Letter to the Financial Times

Would somebody please tell Kevin Allison in San Francisco that his characterization of stock-based compensation as an "accounting charge" is grossly misleading? Stock-based compensation is an operating expense affecting every operating expense line in the income statement. In financial reporting the term, "accounting charge" connotes an unusual, non-recurring item. Nothing could be further from the truth. Financial journalist should give us the facts and not parrot management's spin on the numbers.

For years, Cisco has overstated its earnings by omitting a stock-based compensation expense, while at the same time claiming such an expense in its tax return. New accounting rules are now forcing companies like Cisco to come clean and align their reporting standards with those in other parts of the world - about time.

During the past nine quarters, Cisco earned $11.3 billion in net income. For the first time, this quarter included a stock-based compensation charge of $276 million stock-based compensation expense. During the same period, the company spent $22.8 billion in buying back some but not all of the stock that it issued to employees in lieu of cash wages. The accounting rules in the US allow companies to disguise these types of stock buy backs as an allocation of capital. Properly characterized, they amount to the settling of a deferred compensation liability. Such repurchases hold no benefit for shareholders for the simple reason that the issue of stock to employees increased the share count - an act that dilutes shareholders. Buying back the stock is merely an attempt to bring the share count back to its original level. Intelligent investors view such expenditures as a kin to an operating expense. FASB prefers to placate management and sanctions the obfuscation.

Financial journalists, especially those associated with such highly regarded publications as the Financial Times, have a duty to cut through the accounting intrigue and report the numbers to its readers in a manner that reflects underlying economic truths. Stand up against FASB, the accounting profession and management and stand on the side of truth. Set a standard and refuse to swallow management's interpretation of the numbers without sober reflection.

Albert Meyer