There are debates about options and their "accounting treatment" in today's public corporations. There are investigations. There are restatements of past financial statements. Why? (Because there have always been!)
The real cause is tightly tied to the fact that accounting is an opinion. Each year around tax time someone passes the financial information for an individual or small business to six or eight accountants. They are asked to prepare a tax return. In the best of these articles the tax returns are then submitted to one (or more) IRS agents. In no year that I've read these articles has there been a precise agreement between any of the 6 or 8 accountants. Further, the IRS agents usually disagree.
Take an example: is the purchase of a personal computer an expense or a capital investment? At Sally's Crafts Store where 4 new kilns, 2 dishwashers and a new loom were purchased, it may be a capital expenditure. At Federal Express it may be an expense. If it's part of 5000 PC's being purchased at Citigroup, it may be capitalized.
Most often the rules have more to do with past practices, consistency and a formal declaration of changes in practices than they have to do with law or accounting regulations.
Certainly there are attempts at fraud in some companies. Sometimes those attempts are elegant and difficult to catch. Other times the fraud stems from a change in practice that isn't disclosed in hopes of buying the company some time until things improve.
We are entering a period in which every public company and, quite possibly, some large private companies will be scrutinized. Stock analysts have caused 30% to 40% drops in market caps when companies have missed their "whisper numbers" by a penny. The SEC can now cause similar fluctuations by beginning a sentence with, "We are looking into the accounting practices at..."
The solution is not a team of federal auditors. The solution lies in several key reforms:
- Stop the ridiculous and excessive executive compensation programs.
- Disconnect executive compensation from stock performance and focus it on business performance.
- Expense stock options as if they were any other form of expense.
- Send convicted offenders to jail.
- Hold the boards, the audit committees and the outside accounting firms accountable along with the CEO and CFO of the business.
Warren Buffett has often said, "I'd rather be roughly right than precisely wrong." Intent is a difficult thing to evaluate until you see the extremes of an ulterior motive. Let's get roughly right about these accounting opinions, make the needed changes in laws and enforcement and get back to running businesses - not stocks!
