The
Motley Fool Manifesto Declaration
We
put in a mayday call on the market last month. But given this week's WorldCom
debacle, it's clear we need to raise our voices, so we're rolling out our
Motley Fool Manifesto again. Spread the word. Send this to a friend -- or
anyone who needs to get the message -- Copy and paste to email or follow the link at the bottom.
TMF
Manifesto
Part 1: Auditors Declaration
#1 We, as individual investors, insist that
corporations cease direct-pay relationships with auditors.
Part 2: Analysts Declaration
#2:We, as individual investors, will pay no
heed to Wall Street analysts unless they include disclosure of their firms'
linked business dealings with the company covered AND a past record of their
own recommendations overlaying a graph of that stock's price performance.
Part 3: Management Declaration
#3: We, as individual investors, want
information that provides an accurate picture of companies' financial
condition.
Part 4: Fraud
Declaration
#4: We, as individual investors, demand greater accountability of individual
managers and directors in instances of corporate fraud.
Part 5: Retirement Plans
Declaration
#5: We believe companies should provide a source of independent advice to
employees about their retirement plans. Employees must not be restricted in
their ability to move their money among options within a plan.
Part 6: Accounting Standards
Declaration
#6: We believe that accounting standards should be set without political
interference.
Motley
Fool Manifesto
May
1, 2002
Investors
of the world, unite! The Motley Fool declares mayday on the U.S. stock markets,
the most powerful capitalist force on the planet. Individual investors are
increasingly important to the vitality of the stock market, yet, in terms of
policy and regulation, our voices are a mere whisper compared to the organized
lobbying efforts of the business, exchange, and institutional investor
constituencies. Events over the last year have highlighted some significant
flaws in the way that the U.S. markets are run. This is a direct threat to our
economic well- being, for honest markets are certainly part of the reason that
the U.S. is the destination of choice for so much capital from overseas.
Well,
guess what? The markets need us, individual investors, to help keep it vital.
It is our responsibility to demand that they be run in a way that is equitable,
transparent, and benevolent, not just for us, but for all constituencies. We
are willing to take risks that companies will succeed or fail as businesses; we
should not be willing to risk that we are being deceived, or that the
information we are provided is not an accurate representation of a company's
economic condition.
Starting
today, and for each of the next five business days, The Motley Fool will
present its ideas for best practices in the marketplace. We hope that these
ideas will stir debate among individual investors. We have set up a discussion
board for just that purpose. We will be releasing a new Declaration each day at
noon.
We,
as individual investors, insist that corporations cease direct-pay
relationships with auditors.
Problem:
Auditors of public corporations provide a service to the public. They certify
the veracity of company financials to outside shareholders. Recent events have
shown the weakness of a system where the auditor -- whose responsibility is to
validate the accuracy of company financials -- is compensated by the
corporation itself, which has the responsibility to "increase shareholder
value."
Dr.
Abraham Briloff, professor of Accounting at Baruch College, says this about the
current role of accounting audits of public statements: "The public's myth
regarding the independent audit is just that, a myth."
We
believe that the time has come to address the conflicts inherent in having
companies select their own auditors. An auditor's role is a professional
covenant with those who have no access to the inner workings of public
corporations. We look to the auditor to search for the truth dispassionately
and without collusion with or rancor against the company that is the recipient
of that audit.
Robert
Montgomery once said: "It is the auditor's responsibility to fight the
figures and find the facts and to assemble the figure and to set them forth
truthfully so that all who run can read." In short, the auditor is
supposed to uncover the truth and only put its seal of approval on financial
statements that the auditor feels accurately represent the truth.
This
may seem obvious, but after hundreds of censures by the SEC naming auditing
firms as being either complicit or derelict in cases where corporate financial
restatements are mandated, it seems that the pressure by the corporate clients
-- those who directly contract with and pay the bills to the auditors -- has
undermined the professional covenant of auditors to the investing public. An
audit becomes less than useless if the auditor discovers accounting errors in
its client company's financial statements and does not force the company to
correct them. It is dangerous to the financial standing of investors when the
auditor certifies those statements in spite of its misgivings.
With
this in mind, we believe that the tie between public companies and their
auditors must be broken. Further, we believe that no accounting firm should be
able to provide consulting services to their auditing clients. We propose that
companies pay a fee to the exchange upon which they are listed, and the
exchange then assigns an auditor to each company. The exchange could thus
manage the relationship between auditors and companies. This serves several
purposes:
1.
It severs the provider/client relationship between the auditor and the public
company, thus removing a moral hazard for auditors to serve the needs of the
company rather than the public.
2.
It places direct responsibility upon the exchanges for upkeep of its
reputation. Simply put, if multiple companies on the New York Stock Exchange
have accounting problems within a short time frame, the exchange itself will
develop a reputation for being unreliable. Better to place both the
responsibility and the solution under the same umbrella.
3.
It restores public trust in the process. We now have evidence of potential
fraud being done by Arthur Andersen on behalf of its clients, Enron and Global
Crossing. Although it is impossible to regulate morality, it lies within the
public's interest to remove moral hazards where they exist.
What
you can do This is a call to action. We intend to make the opinions of
individual investors heard about issues that directly affect their ability to
participate in the public markets. Please take a moment to comment on this and
subsequent Manifesto points that will be released over the next five market
days, even if just to say, "Hear, hear!" or "I agree and would
further say..." or "I disagree because.... " We will deliver
these comments to the SEC, members of Congress, and the exchanges prior to the SEC
Investor Summit scheduled for May 10, in which our own Bill Mann will be a
panelist.
Further,
educate yourself on consulting services being provided by auditors to
companies. Call the company's investor relations and ask them. If you get a
good, straight answer, tell them you appreciate it. If you do not, tell them it
is unacceptable and that you'll put your money elsewhere. Believe us, if enough
people do this, they'll get the picture pretty quickly.
We
would prefer that auditors be blocked from providing consulting services, but,
ultimately, it will not be up to us. The next best route is to convince
companies that it is in their own best interest to ensure that shareholders are
comfortable with their auditing relationship. We believe the best way to this
is through an intermediary at the exchange.
MAYDAY!
The Motley Fool Manifesto Declaration #2
TMF
Manifesto
Part
1: Auditors
Part
2: Analysts
Part
3: Management
Part
4: Fraud
Part
5: Retirement Plans
Part
6: Accounting Standards
We,
as individual investors, will pay no heed to Wall Street analysts unless they
include disclosure of their firms' linked business dealings with the company
covered AND a past record of their own recommendations overlaying a graph of
that stock's price performance.
Problem:
Individual investors, in their quest for information about publicly traded
companies, have long looked to Wall Street analysts for opinions.
Unfortunately, there is no way for these same individuals to make a
determination of the analysts' conflicts of interest or the past record of the
analysts' recommendations.
In
the past five years, we have seen the rise of a new phenomenon: the role of
equity analyst as a public figure. Several analysts have become household names
through intense self-promotion, bold calls, working for a high-profile bank, or
even covering the right industry.
This
celebrity rises from the confluence of several events. First and foremost was
the rise of the investor class in the United States. While fewer than 20% of
all households owned stock in some form in 1980, by 2000 the percentage
surpassed 55%. Second was the democratization of information thanks to the
tremendous growth of the Internet. Individual investors no longer had to wait
for days to receive public information to arrive by mail. They can actively seek
out information as fast as the institutions with only a few keyboard strokes.
Third was the rise in popularity of the financial media, particularly
television, where investor information shows made the transition into
entertainment. Suddenly, sell-side analysts and money managers who had
interesting perspectives and attractive personalities were hot commodities on
television.
We
see nothing inherently wrong with this arrangement. Investors look to analysts
to provide interpretation of corporate information, and analysts who are
particularly effective in this regard ought to be well compensated. However,
what has been plowed under during this rise to celebrity are two elements key
to understanding the danger inherent in investors placing too much credence in
analyst opinions. One is the lack of understanding by individual investors
that, unlike auditors, analysts do not perform a public service. Their
motivations are and should be driven by the interests of their employers. The
second danger is that neither a common nomenclature nor an external rating
system exist to track the past performance of analysts.
We
contend that individual investors maintain the power in their relationships
with sell-side analysts. The only power analysts have over us is that which we
grant them. As such, it remains the responsibility of individual investors to
choose what analyst information we find credible. After all, information that
is not deemed credible has vastly reduced value. Unfortunately the current
environment rewards analysts not for being correct, or for even being astute,
but for getting their names in print and their faces on television. By paying
any heed at all to these analysts, we are rewarding them based upon their
abilities to self- promote rather than their analytical ones.
What
to do now It is within our ability to change the way analysts are rewarded, but
more than any other declaration in the Manifesto, this one requires personal
discipline. Whenever you see an opinion by an equity analyst, look to see if
there is disclosure of conflicts of interest. If no such disclosure exists,
studiously ignore the opinion. In investing, what you do not know CAN hurt you.
Analysts gain their power to influence when their opinions have "the
ability to move a stock." The only way they can actually do that is if
people react to their opinions. So, don't.
Feel
free to voice your displeasure to journals and newspapers relying too heavily
on Wall Street analysts for commentary in articles about the market or specific
companies. It is rare that you will see a disclosure in a newspaper, but an
article that quotes several analysts in order to have a "diversity of
opinion" is quite common. Let the papers know by writing to the editor
that you expect them to find different, better, less-conflicted sources for
true diversity. Write the editors. Email CNBC. Let them know that you think
they provide no service at all by feeding consumers advice from analysts.
TMF
Manifesto
Part
1: Auditors
Part
2: Analysts
Part
3: Management
Part
4: Fraud
Part
5: Retirement Plans
Part
6: Accounting Standards
Motley
Fool Manifesto
May
3, 2002
We,
as individual investors, want information that provides an accurate picture of
companies' financial condition.
Problem:
With the broadening base of shareowners in public companies, the balance
against executives by powerful shareholders has abated in the last 20 years. In
an age when shareholder gains are no longer tied to dividends as much as they
are to share price, this leads to a moral hazard for management to "do
what is necessary" to ensure their stocks stay high. We believe that
companies ultimately do a disservice to investors when their managers use
accounting mechanisms such as off-balance sheet financing and mega- sized stock
option grants in order to achieve these aims.
We
consider it to be the height of deceit for a company or its management to foist
risk onto their shareholders without their informed consent. While it remains
difficult for outside investors to get a good idea of management conduct, it
remains incumbent upon us to do our best to do so. Alan Greenspan recently
commented that CEOs "have been drawn to accounting devices whose sole
purpose is arguably to obscure potential adverse results." In most of the
cases of fraudulent management practices over the last 20 years, the
perpetrators have generally gotten off with little more than a slap on the
wrist. In some cases, crooked managers have suffered no legal consequences
whatsoever. We liken this to an old Arab saying: "Trust God, but tie your
camel."
There
is a big difference between accounting practices being prescribed and being
permitted. We reject the notion that a company technically in compliance with
Generally Accepted Accounting Principles (GAAP) but providing minimal
information to its investors is meeting its obligation to them. We would ask
company management to ask this question of itself: If the roles were reversed,
and you were the outsiders, what information would you want to know in order to
make an informed investing decision? While we recognize the fact that outside
investors do not have a right to observe every financial and operational
decision that a management makes, there is a point at which the public's
decision-making is impeded in the absence of information.
Off-balance
sheet activities is one of these areas. Investors need not know the nature of
every leasehold obligation that a company maintains, but where a company
maintains significant risk profile to off-balance sheet activities, these
should be described in a clear, plain-English manner. These obligations include
the use of derivative products, even if the exact level of risk is not known. A
best-effort guess as to the company's potential exposure must be made.
Another
is the accounting of stock options. We believe companies should compensate
their employees and managers for a job well done, but that outsiders must be
able to determine the economic cost of such compensation. Many companies have
fallen deeply in love with the ability stock options allow to compensate
managers and insiders at a high level without needing to recognize this as an
expense.
We
find the arguments against proper accounting for stock options to be remarkably
transparent. "Accounting for stock options will hurt companies and deny
the rank-and-file the opportunity to participate." Of course, the actual
economic cost of an accounting change is zero. NOTHING would change except for
the accounting statements. What this argument says is that companies are more
than happy to use options liberally since they are invisible. Make them
visible, and employees and shareowners will suffer. It is a thinly veiled
threat, aimed directly at the millions of non-executive employees of publicly
traded companies. And it is sickening.
Justice
Brandeis once famously noted, "Sunlight is the best disinfectant, and
electric light is the best policeman." We believe that the best medicine
for the overall health of the U.S. markets and the companies within it is clear
and open communications. Unfortunately, no management is going to step up and
say, "By the way, we're crooked," so it becomes incumbent upon the
investor to use his own interpretation of events. The slightest discomfort with
management activities ought to be enough to prevent an investor from buying
that company's stock.
In
fact, we support the theory that high levels of performance should be richly
rewarded. At the same time, we do not believe that management should be
compensated while obscuring either the expense of said compensation or of the
risks undertaken by the company in order to improve shareholder value.
Famed
investor Philip Fisher evaluates a company for ownership based on, among
others, the principle of management integrity. He shuns companies that shout
about their successes but clam up about their failures. This behavior flies in
the face of a general axiom of business: There are only two kinds of companies
in this world -- ones that currently have problems, and ones that will sometime
in the future. There is no such thing as straight-line growth; there isn't even
really such a thing as predictable growth.
That
said, a management that is overly concerned with the price of the stock and
less concerned with growing the profits, cash flows, and long-term value of the
company is not likely to be forthright when business turns down. When business
leaders refuse to speak their minds, shareholders are surprised when the
inevitable downturn does come. In investing, surprises are not generally a good
thing. Managements that seem focused upon the stock price are not to be trusted
in telling the truth to their shareholders in sickness and in health -- it
would cause too much damage to the one metric they use to judge themselves.
Many
investors are also focused upon the short-term price movements of the stock.
They may, of course, do what they want, but managements must understand that if
they court momentum investors and darling status on Wall Street when times are
great, these constituencies will abandon them at the first hint of bad news. We
hold it as axiomatic that companies generally get the investors they deserve, for
better or for worse. We, as individual investors, as committed owners of
business, believe that the American markets' greatness comes not from the
simple ability of passing pieces of paper back and forth. Rather, the greatness
comes from the fact that we, the general public, can own many of the world's
greatest companies without restriction.
The
companies that treat us as partners -- part owners of the business -- are ones
we wish to support. These companies have management that recognize that their
role is to run the company, take fiduciary responsibility for our money, and
give us honest assessments of the state of the business so that we as outsiders
can continue to make informed decisions. Those who try to game this simple
trust deserve to be shunned. Our job is to focus on managements' ability to
increase shareholder value over the long term by focusing on things like
efficient use of capital and increase in intrinsic value. We will not play the
game with those who know the price of everything and the value of nothing.
What
to do now We should and must demand clear and accurate reporting from
companies. Some company financial statements seem to be written in a purposeful
way to make them inscrutable. See something you do not understand or do not like?
Call up investor relations and have them explain it to you. If the answer is
insufficient, take your investment dollars elsewhere, and be sure to tell the
company why you are selling. Managements may not respond to one such message,
but they would be foolish to ignore such notes in the thousands. Companies that
are not sufficiently forthcoming should see themselves being abandoned by
shareholders.
MAYDAY!
The Motley Fool Manifesto Declaration #4
TMF
Manifesto
Part
1: Auditors
Part
2: Analysts
Part
3: Management
Part
4: Fraud
Part
5: Retirement Plans
Part
6: Accounting Standards
Motley
Fool Manifesto
May
6, 2002
We,
as individual investors, demand greater accountability of individual managers
and directors in instances of corporate fraud.
Problem:
In 2000, there were 233 cases of public companies having to restate their
earnings, at a cost of billions to shareholders. In such cases it is often
difficult to prove fraud on behalf of individuals. It is much simpler, however,
to prove that many top executives and board members with fiduciary
responsibility to shareholders profited mightily as a result of fraud that
happened on their watch. These ill-gotten profits should be at risk.
Although
Enron may be the most spectacular corporate flameout in our history, it is by
no means the first, nor will it be the last. What is intriguing, though, is
that there seem to be little repercussions to the executives who have defrauded
investors or the directors who allowed it to happen either by conspiring or
failing to oversee and protect the interests of outside shareholders. We do not
expect that individual shareholders will have much additional recourse for
recovery of their losses. However, we find it deeply troubling that those who
seek to game the U.S. markets are not consistently and vigorously prosecuted.
Where the cost of getting caught is minimal, those who lack the moral
conviction to do that which is right have all the more reason to break the law
and shareholders' trust.
It
is and will remain the ken of enforcement officials at the SEC and elsewhere to
be the watchdog guarding shareholders against fraud. But we find it
disheartening to know that those who booked nonexistent revenue at Cendant, to
name an example, have never been faced with real risk of prosecution. They got
to keep their ill-gotten money, while outside investors lost billions. It is
just as disheartening to talk with an enforcement official at the Justice
Department who concedes that he has delivered several management fraud cases to
prosecutors only to have them ignored or dismissed as insufficient. The truth
may be more mundane: Such crimes are kind of boring and hard to prove.
The
trouble lies in the fact that it is extremely difficult to prove cases of
securities fraud on the part of insiders. The standard American legal
protection of requiring the prosecutorial burden be "beyond a reasonable
doubt" and the need to show fraudulent intent for securities fraud provide
a significant barrier to making insiders and boards more culpable for misdeeds.
After all, the Supreme Court has found that there is no "aiding and abetting"
liability for securities fraud. In other words, just because something happened
on your watch doesn't mean that you are complicit by virtue of "being
there." The most accessible outlet has thus become civil actions,
shareholder suits against companies and insiders.
Company
executives and boards of directors have a fiduciary responsibility to their
shareholders. Each year, they sign off on the company's financial statements,
thus attesting their accuracy. However, it is possible for certain individuals
to have committed fraud without the board having violated its duties. While
this may not be the most exciting crime of all time, we outside investors
demand that there be some consequence to those who do approve fraudulent
financial statements and those who oversee the executives. We do not believe
that company directors or management should be held culpable for business
failures; we do believe that they should have responsibility for the process
should it become fraudulent.
Our
participation in the stock market depends upon our ability to trust the
statements that companies release to the public. This trust will be
significantly enhanced with the knowledge that a person who does flout the law
and his fiduciary responsibilities does so at significant risk to himself. We,
therefore, suggest that it is in the best interest of every participant in the
public markets that prosecution of securities fraud be extremely aggressive,
that prosecutors should risk bringing cases to trial even if they are not
optimistic about their chances of winning. We would also suggest that it is in
the best interest of all market participants that legislation be enacted making
securities prosecution easier, including that of uninvolved directors or
accomplices. We believe that the responsibility of directors for management's
bad acts be increased. This may discourage people to serve as corporate
directors, but it should also be noted that directors, whose job it is to
protect outside shareholders' interests, would be much less likely to be disinterested,
or to be pliant to the wishes of management in regard to actions that might
rise to the level of fraud.
What
to do now The SEC has significant power to sanction companies for fraudulent
activities. If you suspect that a company's management is violating its
fiduciary responsibility to you as a shareholder, contact the SEC at
enforcement@sec.gov.
Feel
free to voice your displeasure to individual companies if you believe that it
is not operating with the best interests of shareholders in mind. In many
cases, management efforts to confuse or defraud investors include efforts to
prop up share prices. Should investor relations not be able to give you
sufficient answers for your questions as to why the company has chosen to act
in certain ways, your best interest may be to protest their actions by selling.
Watch
boards closely. Even though their exposure to prosecution may be limited,
corporate board members do face the risk of civil judgments for corporate
misdeeds. Should you see several corporate board members resigning at once or
in quick succession, this might be a sign that the company is doing something
that puts the board at risk. Write your congressional representatives and
senators and ask them to support legislation that increases personal
responsibility of boards and managers to management's bad acts.
MAYDAY!
The Motley Fool Manifesto Declaration #5
TMF
Manifesto
Part
1: Auditors
Part
2: Analysts
Part
3: Management
Part
4: Fraud
Part
5: Retirement Plans
Part
6: Accounting Standards
Motley
Fool Manifesto
May
7, 2002
We
believe companies should provide a source of independent advice to employees
about their retirement plans. Employees must not be restricted in their ability
to move their money among options within a plan.
Problem:
As defined-benefit pensions become a thing of the past, the public and
corporations are still learning about the new defined-contribution world in
which we live. Employees in too many companies are given a menu of choices for
their retirements, but not much in the way of guidance. As we have seen with
Enron, a heretofore hidden problem arises when companies encourage or cajole
employees to hold company stock in their retirement plans, or limit their
ability to sell company stock in retirement plans. If 401(k) and 403(b) plans
are supposed to be employee directed, let them direct, with assistance from an
outside consultant as needed.
We
are firm believers in the strength of the tax advantages offered by the 401(k)
and 403(b) plans that companies offer their employees. These plans have the
benefit of allowing employees to defer taxes on part of their income for
decades, and are even further bolstered when companies offer to match a portion
of their contributions.
The
power of the 401(k) is also in its biggest potential drawback. With traditional
pension plans, retirees receive periodic payments that are calculated as a
function of their working base salary. But 401(k)s offer employees the right to
participate at whatever level they wish, or even to not participate at all. The
drawback lies in the absence of unconflicted advice to these employees.
Oftentimes, the plan administrator will offer the employee a list of choices
but will provide no avenue of guidance for the employee to make a situation-
appropriate investment decision.
In
less-savory situations, such as that befalling thousands of Enron employees, a
company's administrator and management actively promotes to employees the
positives of holding company stock in their retirement accounts. Rarely does
such advice turn out to be so devastating as it was with Enron, but nonetheless
the lack of external, independent counsel is disturbing. That Enron employees
were blocked from selling Enron stock in their retirement accounts under most
circumstances is appalling. That some form of this practice is widely used by
companies shows a lack of concern about employee best interests.
This
is not an academic problem. In a 2001 study, the AARP determined that the
average net worth of those over 50 who were in the bottom quartile of wage
earners was $6,500. This is a large group of people for whom even rudimentary
financial advice was overwhelmingly likely to have never been offered, and for
whom the chances of providing for their own retirements, or for retiring at
all, is extremely dim. In the same way, thousands of people have seen their
retirement nest eggs disappear as their 401(k)s, bloated with their employers'
stocks, have succumbed to a grim reality of commerce: Companies fail all the
time.
Employers
must be made to understand that motivated employees are the ones who have the
most security, and as such it is in their best interest to take actions to
provide employees mechanisms to protect their own futures. This means curbing
the use of restricted stock in retirement plans. On the whole, companies have
proven unable to distinguish when the stock markets or economic outlooks will
shift, so mistakes of aggression during the good times are often magnified when
things turn for the worse, which they inevitably do at some point. Employees
who work in fear not only for their current job security but also the standing
of their retirement accounts are unlikely to be positively motivated.
We
have heard legions of stories where employees are expected to make their
retirement choices with minimal opportunity to investigate the options. We
believe that the overall security of the markets will be enhanced by the
additional safety net of 401(k) participants having access to independent
retirement planning advice from a planner with no connections to the company.
We also believe that it flies in the face of the intention of self-directed
plans to force participants to hold company stock for an extended period of
time. Employees are charged with the responsibility to self-direct, as such
they should have the ability to make the choices that will best serve them in retirement.
What
to do now If you are an employee of a publicly traded company, take some time
to ask about the 401(k) program's education offerings and policies regarding
restrictions on selling company stock. You may not be in a great position to
combat any restrictions from within, but you can always ask. Remember, you are
also an owner of the company. Think about having a resolution sponsored in the
annual proxy by someone you know who is also an owner but not an employee. Find
ways to make an issue of the lack of control you have over your retirement
funds. Every shareowner should take the time to ask about the company's 401(k)
program. Does the company require a minimum holding period for company stock
that seems onerous? Beware, this may mean that the company expects employee
retirement money to help prop up the share price.
MAYDAY!
The Motley Fool Manifesto Declaration #6
TMF
Manifesto
Part
1: Auditors
Part
2: Analysts
Part
3: Management
Part
4: Fraud
Part
5: Retirement Plans
Part
6: Accounting Standards
Motley
Fool Manifesto
May
8, 2002
We
believe that accounting standards should be set without political interference.
Problem:
At present individual investors cannot be sure that American accounting
practices provide a framework upon which companies must provide accurate
pictures of their financial standings. We believe that some reforms are
necessary, and that the body that pursues those reforms should be able to
pursue them without interference from political or partisan pressures.
Since
1973, accounting standards in the United States have not been set by a
government agency, but rather by a private group known as the Financial
Accounting Standards Board (FASB). The SEC has granted the FASB authority
status in applying standard practices in accounting. The FASB considers
recommendations from accounting firms, companies, the SEC, the public, and
state and federal lawmakers to set its agenda. In general, this situation works
quite well. The FASB's objective is to promote accounting standards that show
the most faithful reporting of financial information, without coloring these
results for the purpose of influencing investor behavior.
On
several occasions, the FASB has been subjected to significant political
pressure as it considered changes to Generally Accepted Accounting Principles
(GAAP). These constituencies are not necessarily interested in the FASB's
mission of neutral standards. In 2000, the FASB received considerable
legislative pressure from Congress to forestall its decision to eliminate the
"pooling of interest" acquisition accounting methodology after
several influential congressmen were heavily lobbied by groups representing
Silicon Valley high-tech companies who claimed that elimination of this
accounting method would make mergers and acquisitions "more
difficult."
Using
the other method of accounting for mergers, purchase accounting added no cost
whatsoever to these companies' purchases. Purchase accounting, unlike pooling,
simply created significant amounts of goodwill that would need to be amortized
over time.
The
FASB has dealt with political pressures from Congress before -- on stock option
accounting, on pensions, post-retirement benefits, and other issues. Generally
speaking, the role of the FASB has been to try to make companies' reports as
accurate a portrayal of reality as possible. Needless to say, many companies are
opposed to any rule that takes away their ability to color their performance in
the best light possible.
We
see pushback at present from companies regarding proper treatment of employee
stock options and on off-balance sheet information. The FASB has, in the past,
set procedures in place to deal with non-cash expenses such as depreciation of
assets and goodwill amortization, and yet one of the major arguments against
expensing stock options is that they would be extremely difficult to price.
The
fact is that companies have an unequal benefit of being able to ignore the cost
of stock options for existing shareowners. Whether or not there is a cash
effect, clearly such compensation affects shareowners and should be
quantifiable. If faithful reporting of financial information is the FASB's
goal, then this is an issue that deserves addressing -- and many important
market participants, including Federal Reserve Chairman Alan Greenspan, agree.
Yet there are significant constituencies exerting pressure on the FASB to
reject the notion of stock options as an expense. For American accounting to
remain robust, an issue that has been projected to cause an overstatement of
earnings by more than 2% per year among all U.S. companies is important enough
to be reviewed.
The
FASB is an experiment in self-regulation; it is not a governmental body. But in
order for the FASB to be able to provide the best protection possible to
investors, it must be able to exercise its judgment. Where Congress and other
regulatory bodies impede the ability of the FASB to self-regulate, the entire
accounting system is undermined. Such actions are rarely done at the behest of
the individual investors. More often, it is the companies that do not want the
light of day shined on certain practices that squawk the loudest whenever the
FASB considers a change.
What
to do now More than 50% of all American households own stock in publicly traded
companies. Although our ability to show a unified front is constrained relative
to the concentrated lobbying efforts of corporations, we individual investors
form a massive constituency. In situations where legislators attempt to
interfere with the workings of the FASB, they may be receiving significant
input from corporate lobbying groups. Write your congressional representatives.
Let them know that your financial best interests are served when the FASB can
make decisions absent of such interference. Let 'em know that you vote, and
that you expect your legislators to support the FASB's judgment.
http://www.fool.com/specials/2002/02050100man.htm