Greenspan Repeats Call to Expense Stock Options

The lucrative stock options that showered millions of dollars on top corporate executives over the last decade should be treated as a business expense even though that accounting change could significantly reduce a corporation’s reported profit, Federal Reserve Chairman Alan Greenspan said Friday.

Greenspan, in remarks to a financial markets conference in Sea Island, Ga., continued his campaign to get accounting regulators to force a change in the way companies deal with options on their books.

His proposal represents a rare break with the Bush administration, which has sided with corporate executives in opposing the accounting change.

Greenspan’s proposal is the major recommendation he has made in response to the collapse of Enron Corp., whose top executives made millions of dollars in profit by cashing in their stock options before the company’s stock collapsed, wiping out the retirement benefits of thousands of the company’s rank-and-file workers.

Greenspan said that under the current practice, which does not require companies to reflect the true cost of options in their annual reports, investors will continue to receive inaccurate information about the financial status of a company.

“The failure to expense stock option grants has introduced a significant distortion in reported earnings and one that has grown with the increasing prevalence of this form of compensation,” Greenspan said.

Greenspan expanded on arguments he made in March that the current practice of not counting stock options as a business expense was inflating corporate profits and giving investors a false impression of the true value of the company.

The change would have a huge effect on U.S. companies.

The Federal Reserve has estimated that annual corporate earnings growth between 1995 and 2000 was 2.5 percentage points higher for big companies because they did not have to count options as expense subtracting from their earnings.

Stock options give employees the right to buy a company’s stock in the future at a predetermined price.

The more the company’s stock price rises, the more valuable the stock option becomes.