The Wall Street Journal has an op-ed (subscrip. req.) in today’s edition by Craig Barrett, the CEO of Intel, arguing that the main beneficiary of a proposed Financial Accounting Standards Board (“FASB”) rule requiring companies to expense broad-based employee stock options will be the securities plaintiffs’ bar. The problem is that there is no “model that can value options with any degree of accuracy.” Companies will therefore have to make choices about how to value their options that can have a substantial impact on reported earnings. “The result,” Barrett concludes, “may be a field day for trial lawyers and class action lawsuits.”
Quote of note: “Two Columbia University economists, Charles Calomiris and Glenn Hubbard (who served as chairman of President Bush’s Council of Economic Advisors from 2001 to 2003), have extensively documented the uncertainty surrounding attempts to quantify options expenses. The Black-Scholes model and its cousin, the binomial method, can be wildly inaccurate. FASB knows this and is, therefore, unlikely to require any single means of calculation. It’s all up to corporate financial officers and their auditors, none of whom have a reliable method to account for options. It’s the blind leading the blind leading the blind.”
Addition: FASB has issued an “Exposure Draft” and background materials for their proposed new standards for expensing options.