Consider recent comments by Senator Mike Enzi (R-Wyoming), who is holding hearings to allow small business executives to spout off against accounting reform. Specifically, these managers are yet again attempting to thwart the the Financial Accounting Standards Board's efforts to require the expensing of stock-based compensation. Of course, they covet the privilege of abusing corporate resources instead of acting as good stewards for the owners -- the stockholders of the business enterprise.

The Washington Post reports that the senator berated the chairman of the FASB Robert Herz with the comment, "I’m hoping small businesses don’t have to wage an 11th-hour campaign to get FASB to listen." He also chided Herz to contemplate the effects upon small businesses. Oddly, the senator didn’t advise Herz to ask investors and creditors about the consequences of poor and reprehensible accounting practices.

These corporate officials provide no new arguments or theories to bolster their claims, but rely on vacuous assertions. They claim that expensing options will hurt their search for talented managers, but cannot generate any evidence to that effect. Given that Microsoft now expenses stock-based compensation and appears not to have troubles hiring good people, I believe the assertion false.

 

Some business officials claim that the new accounting would lead to fewer stock option plans. If so, that might in fact increase corporate governance and induce a less greedy culture. Berkshire Hathaway does not distribute stock options but provides cash incentives instead. If Warren Buffet prefers this approach, I feel that small business managers should quit being so short-sighted and listen to why he prefers cash incentives to stock options.

Another excuse for maintaining the status quo is that it will enervate the entity's competitive advantage vis-a-vis foreign companies. The International Accounting Standards Board, however, is moving full steam ahead to require the expensing of stock-based compensation. This move by the International Accounting Standards Board implies that European and other concerns that follow international accounting rules will soon expense stock options as well as their American counterparts. In that scenario no competitive debilitation will occur.

Let's review one more time why the FASB must compel the expensing of stock options. The primary reason for promulgating this rule rests upon definitions. Revenues are operating items that increase shareholder wealth, while expenses are operating items that decrease shareholder wealth. Clearly, stock-based compensation schemes belong to the set of operating activities of the firm because everybody agrees that these plans exist to provide compensation to various managers. The only remaining issue is whether these arrangements affect the wealth of the owners. Clearly they do, for the incremental shares issued by the corporation dilute the wealth per share of existing stockholders. Since these stock option plans are operating items that decrease shareholder wealth, they ought to be accounted for as compensation expense.

An irksome aspect of these hearings held by Senator Enzi focuses on who takes the platform. The senator has supplied small business managers a forum to carp about accounting, but apparently has not asked investors or creditors to tell their side of the story. I suspect that the senator expects more campaign contributions from these corporate executives than from the investment community.

Most curious is the observation that Senator Enzi is the only accountant in Congress. From this fact and from his committee hearings I infer that real reform in the accounting arena cannot be conducted by those in the accounting profession. Whether they serve corporate management or work for an external auditing firm or obtain a seat in Congress, too many professional accountants still believe that the purpose of financial reporting is to aid and abet managers in achieving their goals.

Shame on Senator Enzi for obstructing accounting reform.