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SUBCOMMITTEE ON COMMERCE, TRADE, AND
CONSUMER PROTECTION July 8, 2004 I commend Chairman Stearns for holding this important hearing. I also commend Chairman Barton for defending this committee's right to address matters within our longstanding jurisdiction over accounting standards and the Financial Accounting Standards Board (FASB). FASB's exposure draft and the Baker bill raise significant issues that deserve the attention of this Committee and the public. The investigative hearings chaired by Rep. Greenwood into the causes and effects of the Enron, Worldcom, HealthSouth, and other accounting debacles, and the hearings chaired by Rep. Stearns into the failings in U.S. accounting standards that facilitated these debacles, revealed stock option abuses, accounting standards riddled with loopholes, audit failures, and massive failures of corporate governance, among other things. We directed FASB to fix the problems within its purview, such as special purpose entities, stock option accounting, and establishing a framework for measuring financial and nonfinancial assets at fair value. I understand that FASB has moved forward on these issues, and I commend them for it. We are here today because FASB issued an exposure draft requesting public comment on a proposal to require that companies account for stock options as an expense using the fair value method. More than 575 companies have announced their intention or have begun to voluntarily expense their options at fair value. The comment period for FASB's proposal expired at the end of June. FASB is now in the months-long stage of reviewing all the comment letters, holding public hearings, and redeliberating and revising the proposed standard. I agree with FASB's process. I cannot say today whether I support or disagree with the FASB standard since it is still in a state of flux. I do agree with the general principle, and observe that it is required under international accounting standards for our foreign competitors starting in 2005. As for the Baker bill, all I can say is: "What were they thinking?" I thought we had enough of phony accounting and its devastating impact on companies, investors, and retirees. It is a case study in why Congress should not be in the business of writing accounting standards. It decrees that companies shall count options as an expense for the five highest executives but not for anyone else. The bill even prohibits the voluntary expensing of options by those 575 companies that are currently voluntarily expensing their options. It mandates that, when a company is calculating the expense of options for the top five executives, it assume that the stock price volatility is zero, i.e., it never moves up or down. This is a make-believe world. There are other gems in here as well. I ask unanimous consent to insert in the record FASB's letter analysis of the bill, in response to questions that I posed; an op-ed article by Warren Buffett; and a statement by FACTS, the Financial Accounting Coalition for Truthful Statements, a coalition of over 30 pension funds, consumer/investor groups, and labor unions who oppose this bill and support FASB's proposal.In closing, I look forward to hearing the testimony of FASB, GAO, and our high tech witnesses this afternoon. I am not opposed to trying to find a fair and reasonable way to address the tech industry's concerns with the FASB proposal. The Baker bill is not the answer, and deserves to be deposited in the dustbin.
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