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Accounting Manipulation on Capitol Hill

How the House of Representative is Defrauding Small Investors


Congressionally Sponsored Accounting Manipulation

If the House of Representatives has its way, management will be stripped of the power to make assumptions it believes reflects the true economics of the business. HR-3574 requires that the volatility assumption (I’m not making this up) be 0%. In other words, Congress is literally forcing publicly traded companies to assume that their stock price will not fluctuate at all at any time in the future when calculating stock option expense. This will result in financial reports severely understating the stock option expense given to the top five employees. Combined with the fact that the stock option grants given to the potentially hundreds of thousands of other employees are not counted at all, it becomes painfully clear that this act is not meant to prevent future abuses of executive trust; it is meant to serve as a token vote House representatives can use to spout their dedication to ending corporate fraud and abuse while not only condoning, but mandating, that companies maintain the status quo.

The Future of Stock Option Expensing

Right now, Senator Shelby, Chairman of the Banking Committee, has expressed his intention to do everything in his power to squelch the bill when it is introduced in the Senate. Unfortunately, it is possible the legislation may be attached as a “rider” to a non-related bill that is certain to pass.

Take Action - What You Can Do

The House of Representatives, to its shame, has engaged in a game of the Emperor’s New Clothes. To add insult to injury, it has done so with its eyes wide open at a time when the international accounting community in over ninety separate countries is going to begin expensing options in January of 2005. America, once the symbol for transparent markets and managerial accountability, still refuses to conform. Thankfully, now that you know the details, you can do something about the problem! Call or write both of your Senators and express your disgust with the House’s recent passage of HR-3574. Ask them to oppose any such legislation should it arise in the Senate. Also, take a moment to check the voting record of your House representative; if he or she supported the bill, contact their office and let them know you are extremely displeased with their actions. Likewise, if they opposed the legislation, thank them for looking out for the small investor.

More information

I highly recommend you read the transcript of FASB Chairman Robert H. Herz's testimony before the Commerce, Trade and Consumer Protection Subcommittee of the Committee on Energy and Commerce in response to HR-3574.

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