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

Letter to Financial Accounting Foundation

"Lord of the Lies" - how FASB and Corporate America conspired to steal your wealth.

Three enormous lies mock the signature of any auditor on the financial statements of a public company prepared under US GAAP:

Lie # 1: The omission of a stock option expense hugely overstates pre-tax income. Notwithstanding, tax returns include a deduction for stock option compensation expense.

Lie # 2: The tax expense line contains a deferred tax adjustment for a permanent difference to hide the fact that the company pays little or no taxes. The deduction of a stock option compensation expense on the tax return means the effective rate is close to zero, so embarrassingly low that a journal entry had to be devised to hide this fact from the public eye.

Lie # 3: The cash spent on buying back the stock issued to employees in lieu of cash compensation is merely settling a deferred compensation liability. FASB says you can show it in the financing section of the cash flow statement and pretend it is an allocation of capital - not so!

These lies gave executives carte blanche to transfer untold billions from investors' retirement accounts to their own bank accounts via stock option compensation plans. Executives were compensated way beyond their true worth. Investors who were tricked by FASB's subterfuge paid for all of this. More pain is coming, now that companies are being required to expense stock options.

To those who deny that FASB lives in cloud Cuckoo land, here is an e-mail we received from a person who holds a senior position in the finance office of a FORTUNE 100 company:

"Are you still following FAS123R? The implementation is a total nightmare. I am slowly coming around to your view that the best approach is simply to true-up the intrinsic value of stock each period. Both Black-Scholes and binomial models give worthless valuations and when you layer the complexity required by FAS123R, it doesn't seem to pass any cost-benefit analysis. I went to an E&Y seminar on implementation today where they began by distributing 300 page binders."

What a smokescreen to avoid reporting a stock-based compensation expense that is readily available on a company's tax return.

From a FASB perspective, my criticism is harsh, but I have analyzed financial statements for the past ten years. In doing so I have seen insiders plunder their shareholders, making out like bandits, earning compensation packages that would make the Royal House of Windsor blush. On the other side of the fence, innocent investors entrusting their retirement funds to mutual funds, often invested in index funds that hold these miscreant stocks, have lost billions upon billions of dollars because companies were allowed to overstate earnings so that insiders could participate in a race to see who gets onto the FORTUNE or Forbes billionaires list first. It is extremely bad for the social fabric of the nation, if I may sound so pedantic. Once you begin to analyze the impact of stock option accounting in this fashion, as I have done the past ten years, you realize the true meaning of the adage "fact is stranger than fiction." FASB has failed the American worker, in its efforts to be the corporate executive’s best friend.

Albert Meyer