Accounting
The Earnings Illusion
The Options Dodge
Shawn Tully
Even if FASB eliminates pooling and the write-off of in-process R&D, companies will get to keep another cherished loophole, the scandalously easy treatment of stock options. The similarity is striking. By minimizing the cost of acquisitions, pooling tempts CEOs to overpay for trophy acquisitions. And because companies don't have to expense options grants at all, options accounting encourages directors and managers to overpay their CEOs and other brass. Of course, options are not really free: They cost shareholders plenty by diluting earnings. Accounting expert Jack Ciesielski collected data showing what earnings for the 500's largest members would have been, had the companies subtracted the true cost of their options grants from reported earnings. He found five companies where earnings would have been at least 5% lower. Properly valuing big options grants at Lucent, for example, would cut reported earnings by 16.7%. Nor is the options gap just a trademark of Silicon Valley. If you adjust for options costs, Du Pont's earnings would be overstated by 8.9%.
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