Dear Colleague:

In the immortal words of the late President Ronald Reagan: "There they go again!"

After making it possible for crooked executives at Enron and other companies charged with fraud to loot their companies through stock options at the expense of shareholders and retirees, Congress is poised to repeat that dreadful mistake by passing H.R. 3574, the Stock Options Accounting Act. This is a bad bill.

Federal Reserve Board Chairman Alan Greenspan warned on April 21, 2004, that "it would be a bad mistake for the Congress to impede FASB" because the proposed FASB changes to accounting for stock options "strike me as correct." In a recent op-ed article, famed investor Warren Buffett called the legislation "nonsensical" based on "fuzzy math" and "Alice-in-Wonderland assumptions." See more on the positions of Greenspan and Buffet in the attachment to this letter.

H.R. 3574:

• Decrees that stock options be counted as an expense only when they go to the chief executive and the other four highest paid executives in a company but be disregarded as an expense when issued to other employees in the company.
• Mandates that when a company is calculating the expense of the options to these five executives, it must assume that the stock price has zero volatility, i.e., it never moves up or down. As Buffett notes, the only reason for making such an assumption is to "significantly understate the value of the few options that the House wants counted" in order to allow executives to lie about what they are being paid and overstate earnings.
• Prohibits the SEC from recognizing as "generally accepted" any accounting principle relating to the expensing of stock options unless and until two conditions are met: (1) an economic impact study by the Secretary of Commerce and the Secretary of Labor has been completed (due one year after date of enactment), and (2) the accounting principle complies with the terms set by the bill, including using exercise or settlement date measurement and zero volatility.
• Would prohibit the voluntary expensing of options by the over 576 companies, including Ford, General Motors, Microsoft, and Citigroup, that are currently voluntarily expensing their options at fair value under FAS 123. H.R. 3574 says that there is no GAAP for option expensing for the year of study and then only for the top five officers using the assumptions and measurement methods dictated by the bill. Companies wanting to provide honest numbers would be banned from doing so, and would have to restate their financials at substantial cost.

Investors are still getting mugged by corporate accounting scandals. Put an end to bad incentives and phony accounting. Vote "NO" on H.R. 3574.

Sincerely,

/s Jan Schakowsky, Ranking Member
Subcommittee on Commerce, Trade, and 
Consumer Protection