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Published: Monday, 7/15/2002

No option on options

Partisan games on Capitol Hill ought not deter an effort to require businesses to properly count executive stock options as an expense. This vital accounting reform goes to the heart of the unfolding scandals that have unnerved investors and threaten to drag down the life savings of many Americans.

Stock options, not currently counted as a corporate expense as are such compensation as salaries and bonuses, inflate companies' earnings, misleading investors as to their real value and potential.

One example cited during Senate debate: Software developer Seibel Systems, Inc. reported $359 million in operating income in 2000. But if the company had to deduct stock options, it would have shown a $50 million loss.

In an odd reversal, Senate Democrats, who have been leading the charge toward reform, blocked a proposal by Republican Sen. John McCain of Arizona to mandate that the cost of stock options be subtracted from reported profits. Either Democrats don't want to allow Senator McCain credit or they're backing off on this key measure. Partisan foolishness should not be allowed to deter progress.

In addition to promoting an unrealistic profit picture, stock options give executives an incentive to indulge in unacceptably risky, questionable, or even illegal schemes to boost stock prices in the short term. And, since options are simply handed to recipients, they allow CEOs and other corporate officers to suck money out of companies without the personal risk shouldered by ordinary investors.

While some senators contend that Congress should not be writing accounting rules, it is evident from what's taken place at Enron and WorldCom that a laissez faire approach hasn't worked.

The old argument that stock options encourage good management and corporate governance because they align the interests of executives and stockholders doesn't hold up in the real world of greed and deception.

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