Who Rules Accounting?
The latest in the regulatory struggle between FASB and Congress over the expensing of stock
Dennis Beresford is having flashbacks these days, and they are anything but pleasant. Congress
is once again trying to derail the Financial Accounting Standards Board's efforts to require
companies to expense stock options. And for the former FASB chairman, the lawmakers' moves
are a painful reminder of what happened during his tenure at the board's helm nearly a decade
ago. "It's déjà vu all over again," says Beresford, now a professor of accounting at the University
Under intense pressure from Capitol Hill, FASB under Beresford backed off of a similar
proposal in 1994, compromising not only the board's position on expensing but its very
independence as a standard setter. It took years for the board to buck congressional pressure
again, this time on new, far-reaching rules on derivatives and business combinations. Of course,
FASB's submission to Congress did nothing to prevent lawmakers from scolding the board for
the cautious pace of its its deliberations on accounting issues related to the Enron scandal.
No one in Washington, D.C., claims to desire an end to the independent setting of accounting
rules, at least in public. The legislators insist they are merely trying to aid the struggling
economy by encouraging greater use of entrepreneurial incentives.
But will keeping stock options off the income statement have the desired effect? Many observers
contend that while FASB's 1994 decision not to require options expensing may have inspired
entrepreneurs, it also certainly motivated executives to pump up their companies' stock prices by
whatever means necessary. In fact, the widespread use of nonexpensed stock options is generally
thought to have led not to economic strength, but to inflated stock-market valuations, excessive
executive compensation, accounting frauds, bankruptcies, and the loss of approximately $5
Some managers may welcome congressional efforts to reinflate the stock- market bubble, but
forcing FASB to back down on options could instead undermine whatever confidence in the
financial markets investors have since regained. "The capital markets need high-quality,
unbiased information to make allocation and pricing decisions," says FASB board member G.
Michael Crooch. "Managing accounting data for some hoped-for economic result is too risky
A Simple Bill
The current fight is still in its early stages. Until recently, in fact, the latest debate over expensing
was limited to arcane issues involving valuation methodology. But now Congress has reentered