Editorial: Expenses are not footnotes

Monday, May 6, 2002 | 8:54 a.m.

In the aftermath of any calamity, such as the bankruptcy of Enron, there should be innumerable brainstorming sessions to determine what went wrong and to recommend procedures to reduce the chance of a repeat performance. And the recommendations, if sound, should be adopted, given the evidence of what has just happened. One such recommendation coming out of the Enron collapse has been made by Federal Reserve Chairman Alan Greenspan.

Greenspan says that stock options lavished on corporate executives should be accounted for as business expenses that are fully disclosed to investors in the earnings-per-share and overall performance reports. Congress had the chance in 1994 to add this stipulation to rules enforced by federal accounting regulators but voted against a bill to require it. Based on calculations made by the Federal Reserve, Fortune 500 companies would have had their annual profit margins decline from 12 percent to 9.4 percent if stock options had been counted from 1995 to 2000.

Essentially, Greenspan is saying that stock options awarded to senior managers -- options that are worth multiple millions of dollars to the executives -- should be listed forthrightly on the books as expenses, even though the listing would detract from reported profits.

Without the change, Greenspan says, investors will continue receiving inaccurate financial reports on the company. In what has become a national scandal, top Enron executives cashed in their stock options before the collapse of the company's stock, reaping millions that investors thought belonged to the whole company. Executives at companies that engage in this practice are allowed to buy company stock in the future at a price that was determined well beforehand. As the stock rises, so does their wealth -- yet investors are kept in the dark about how much of the company's wealth is tied up in this manner. If the options were regarded as expenses, they would be balanced with earnings. The average investor is always the one hurt by overstated earnings.

President Bush, siding as he too often does with big business, opposes this accounting change. But the country should listen to Greenspan. Our economic system is tied into investing, and investing depends on companies coming through with accurate information, not accounting tricks.