[link|http://www.chron.com/cs/CDA/story.hts/business/1501948|link]

Stock-options lobby keeps investors in dark
By SCOTT BURNS
Universal Press Syndicate

"Only two companies in the S&P 500 include employee stock-option grants as an expense in their income statements."
-- Standard & Poor's, May 14, 2002


The other 498 don't include employee stock-option grants as an expense. Instead, stock options are buried as a footnote. That pretty much tells us where corporate America stands. Corporations, particularly technology companies, have been fighting attempts to change the accounting for stock options since they became an issue in 1994.

Then, the Senate voted 88-9 for the Lieberman Amendment. This amendment scuttled a Financial Accounting Standards Board rule that would require employee stock options to be treated as an expense. As a result, people continued to invest in the dark, and the stage was set for the bubble that followed.

The bipartisan Lobby to Keep Investors in the Dark worked well then. It continues to work today.

We're still in the dark about what we really own and what it might be worth. Here's an example: Dell Computer was recently selling at 40.2 times trailing fiscal year earnings. But when you adjusted its figures according to Standard and Poor's "core earnings" measure, the stock was selling at a stunning 122.6 times earnings. As you might expect for a stellar growth company, the entire difference is accounted for by the cost of stock options.

I got those figures from a recent study by the Leuthold Group, a Minneapolis-based investment strategy group. They took the 25 largest U.S. companies and crunched the numbers to examine the relationship between GAAP reported earnings and Standard and Poor's new core earnings. To do this, they started with GAAP (generally accepted accounting principles) earnings.

Then they adjusted for pension gains, gains or losses from asset sales, gains or losses from litigation or insurance, merger and acquisition expenses, impairment of good will, and (finally) stock options.

While other adjustments can loom large, the adjustment for stock options was the largest -- or only -- adjustment for 15 of the 25 companies. The price-to-earnings multiple of the median company rose from 24.7 under GAAP accounting to 31.0 under the S&P core earnings measure. That's a shift of 25 percent, just from accounting.

Needless to say, some companies are affected more than others. Stock-option expenses are major at Dell (27 cents on 48 cents GAAP earnings), Intel (15 cents on 19 cents GAAP earnings), and Microsoft (42 cents on $1.45 GAAP earnings), but they are rounding errors for companies like Citicorp (11 cents on $2.82 GAAP earnings), Exxon Mobil (4 cents on $2.20 GAAP earnings), and Wal-Mart (2 cents on $1.49 GAAP earnings).

At Berkshire Hathaway, there is no adjustment for options. Warren Buffett, the legendary investor, doesn't like stock options and thinks they should be accounted for as a corporate expense.

Today, technology companies are defending the current treatment of stock options just as they did in 1994. They say stock options are a vital recruiting tool. They say stock options are an irreplaceable part of their incentive and compensation plans. They do everything but face the chaos and devastation that now reigns in technology and in the portfolios of those who held technology stocks.

From their peak in February 2000, technology stocks have gone from accounting for a record 34 percent of all market value in the S&P 500 to only 14 percent. The average technology mutual fund has fallen 37.7 percent so far this year and 41.3 percent in the last 12 months.

The average telecommunications fund has fallen 41.6 percent and 48.5 percent over the same periods. For investors in these companies, as well as many of their employees, the decline ranks up there with the Great Depression. The misuse and misleading accounting for stock options played a major role in this.

In a milder decline it might be possible to defend the obfuscation of stock-option accounting. But this is not a mild decline. This is a tipping-point decline, one that alters perceptions and changes lives. I understand that. You understand that. Warren Buffett understands it.

So how is it that the technology managers and their politicians don't get it?