Lieberman + Bad Accounting = BFF

With all of the media attention given this week to Joe Lieberman’s waivering loyalty to the Democratic Party, I decided to go on a slight tangent and discuss how, more than anybody else in America, Joe Lieberman is responsible for some of the worst corporate abuses during the recent tech bubble and for the current growing options backdating scandal. The Connecticut media has noted this, but not the national media, and it is real important. In short, in 1993, Lieberman saved amazingly bad accounting for when a company pays an executive with stock options instead of cash. This caused options to flourish. Options make an executive more concerned with short-term fluctuations in her company’s stock price than in running the company well. Disaster resulted. Details below the fold. Back on track tomorrow.

In 1993, the Financial Accounting Standards Board (FASB) was set to fix the accounting rules for compensatory stock options. The rules had been that paying an executive with a stock option reseulted in no cost or expense to the company. Cash compensation is an expense. Giving an executive a piece of the company for nothing dilutes the value of the stock for the other shareholders every bit as much as paying cash, but no expense was booked. There were a few weak technical arguments in favor of the old rule: Options are hard to value. The real compensation is when the executive exercises the option ane that is not when the compensation was provided. And so on.

FASB rejected these arguments. Along comes Joe Lieberman! Reflecting the cost of options on financial statements will hurt high-tech companies. This will destroy America. Lieberman pushes through a Sense of the Senate resolution that Congress would disband FASB if they require expensing of stock options. FASB caved. PBS has a nice discussion of all this online at Lieberman v. FASB

Just this year, FASB began requiring expensing of stock options. The Republic did not fall. FASB was able to hide behind residual post-Enron public distrust of corporate executives and Europe adopting options expensing to finally get things right 13 years later.

One can wonder how much better American business would have been run for the last 13 years were it not for Joe Lieberman.

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4 Responses to Lieberman + Bad Accounting = BFF

  1. Phill says:

    As a direct result of the FASB rules most companies have stopped giving stock options.

    They now give out restricted stock instead. The math is inescapable, giving the employee 100 shares will look exactly the same on the books as giving out 300 stock options. And unless the company manages better than 20% growth over 3 years the employee does better. If the company does less well they do a lot better.

    Lieberman is also responsible for the DHS debacle. In ten years time the reorg migh show real returns on the effort put in. But in the short term it was absolutely the worst move possible. The entire national security apparatus wasted an entire year doing the re-org at the time they needed to move quickly to stop Al Qaeda.

    The Bush Administration knew that the reorg was a terrible idea but they did not move fast enough to stop it, they did not realize that Liebermann could get so much public support behind his proposal they would be forced to accept it.

  2. GeorgeMundstock says:

    For accounting purposes, the rule has been for some time that with restricted stock the expense is spread over the vesting period. This is as good a rule as any. Thus, there is no accounting incentive here, as there was for options. That companies are switching over to the better form of compensation now that the accounting grease for options is gone shows the untoward impact of the old rule. Also, options are more volitile than restricted stock, so that restricted stock should not cause managements to focus as much on short-term stock fluctuations — hopefully.

  3. markarthur says:

    It seems to me the options-accounting issue is a crock. There may be other definitions, but it seems to me the primary function of accounting to is to document the inflows, outflows and stores of actual cash or its proxies over time. When a transaction or asset becomes difficult to represent (such as pension liabilities), some formula is developed to approximate a present cash value. Investors can then use those calculations to value securities.
    Much as it galls eveyone to see execs receive paper with no apperent cash value that eventually becomes coverted to millions of dolars, the actual cash effect is really only found in the dilutive cost spread out among all the stockholders (and often mitigated by buybacks (another scam if you ask me)), which is already fully accounted for in the equity accounts. Whatever the theoretic cash value of the option grants, they never will actually cost the company physical cash (unlike everything else that is accounted for, (and don’t start with the cost of stock that could have otherwise been sold – since when does any entity have to account for what might have been?)). For any investment analyst the option cost is useless and will get stripped out quickly (along with depreciation and other non-cash items) on the way to a cash-based valuation.
    Though actual cash (dilutive) option costs could likley be packaged for disclosure with more impact, they wouldn’t likely have the headline value of the exercise values that now gross us out. But the notion that current rules actually describe some actual disposition of actual corporate resources is completely fanciful.

  4. zenseeker says:

    Happy July 4th to all of you. I just made a flash game where uncle Sam is seen throwing knives at Joe Lieberman called Back Stabbing Lieberman. Check it out at my site here: http://zenwire.com/flashmedia-lieberman.php. There are also other games there: bush rampage, bush-rice-terror, bush shootout, dancing bush and Blair and other political games as well. Feel free to comment for I plan to make more.

    Anyways, back to the meaning of July 4th for my kids.

    I was watching all the fireworks outside with my kids, and my 8 year old daughter asked me to explain what was Independence day all about. I gave her the story about colonial settlers under British rule and how we united with help to fight off the Brits and finally won our independence for the right to self rule. And when I told her that this is when our founding fathers wrote the Declaration of Independence, and she asked me what was that? I did not remember most of the words, but incredibly my wife did and we utter some of those magic words together. I told her that when I was a kid and read those words, I thought that they were the most beautifully written words I had ever read. And I told her that the meaning and values of that document was why I love America so much; this was the country that taught me what it meant to be equal and fair, good and just. But I also told her that half of it is no longer true, and my son, a typical Nintendo kid, interjected: “You mean, like Bush.” I did not even have to reply or convince him, somehow he already knew. In a way I should be glad that even my kids can see what is going on, but somehow I actually felt sad. Sad because they don’t know the full weight and tremendous implications of those words written so long ago. Sad because they don’t realize the power of words and the actions they can generate; and those specific words were so powerful that countless men have willingly died through the eons in their fleeting attempt to manifest and live out those words and its ideals. And sad because I grew up in a world full of idealistic ideas and enthusiasm, teaching us to not only help and improve ourselves, but all of humanity and mankind as well. Reaching the moon and back was just a small sampling of things to come. I am what I am is because of these words and it makes me sad to realize that my kids will not have these words and the absolute belief and trust in those very words (inscribed by our founding fathers) to guide and instill in them a sense of justice and equality. They know the world is not fair and they will never expect it to be fair. I have always hoped the world will be so, but I can no longer say this with a straight face to my kids that the world will be this way when they grow up or if it will ever even get any closer to those ideals; just like the moon is no longer feasible to travel to anymore, there is easy money to be made elsewhere subjugating the people of this planet.

    After reading the Declaration of Independence at this site: http://www.law.indiana.edu/uslawdocs/declaration.html, it struck me that I was wrong in telling my daughter that half of it was no longer true. I actually thought that most of it is no longer true. For brevity, skipping the preamble and just going through the grievances, I saw many justifiable grievances then that equally apply to now, the year 2006. Just read them for yourselves and see how many of them our government is guilty of or in the process of taking those very same rights away. I will mark the ones I feel they are guilty of.

    Guilty: He has refused his Assent to Laws, the most wholesome and necessary for the public good.
    Guilty: He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.
    Guilty: He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.
    Guilty: He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their public Records, for the sole purpose of fatiguing them into compliance with his measures.
    Guilty: He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.
    Guilty: He has refused for a long time, after such dissolutions, to cause others to be elected; whereby the Legislative powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.
    Guilty: He has endeavored to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands.
    Guilty: He has obstructed the Administration of Justice, by refusing his Assent to Laws for establishing Judiciary powers.
    Guilty: He has made Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries.
    He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance.
    He has kept among us, in times of peace, Standing Armies without the consent of our legislatures.
    Guilty: He has affected to render the Military independent of and superior to the Civil power.
    Guilty: He has combined with others to subject us to a jurisdiction foreign to our constitution and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:
    Guilty: For Quartering large bodies of armed troops among us:
    Guilty: For protecting them, by a mock Trial, from punishment for any Murders which they should commit on the Inhabitants of these States:
    For cutting off our Trade with all parts of the world:
    For imposing Taxes on us without our Consent:
    Guilty: For depriving us, in many cases, of the benefits of Trial by Jury:
    Guilty: For transporting us beyond Seas to be tried for pretended offences:
    For abolishing the free System of English Laws in a neighboring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies:
    Guilty: For taking away our Charters, abolishing our most valuable Laws, and altering fundamentally the Forms of our Governments:
    Guilty: For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.
    He has abdicated Government here, by declaring us out of his Protection and waging War against us.
    Guilty: He has plundered our seas, ravaged our Coasts, burnt our towns, and destroyed the lives of our people.
    Guilty: He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation and tyranny, already begun with circumstances of Cruelty and perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation.
    Guilty: He has constrained our fellow Citizens taken Captive on the high Seas to bear Arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.
    Guilty: He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages, whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions.
    In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.
    Nor have We been wanting in attentions to our British brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which, would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

    Ok that is enough for Independence day, and be sure to chech out all the political games at http://zenwire.com
    Take Care,
    Zenseeker

    Tags:
    Lieberman, BackStabber, Flash Game, virtual blood, independence, meaning of independence, idealism, lost innocence

    This is my first entry and happy July 4th to all of you. I just re-made a flash game where I made uncle sam throwing knives at Joe Lieberman called Back Stabbing Lieberman. Check it out at my site here: http://zenwire.com/flashmedia-lieberman.php. There are also other games therel: bush rampage, bush-rice-terror, bush shootout, dancing bush and blair and other political games as well. Feel free to comment for I plan to make more. Anyways back to the meaning of July 4th for my kids.

    I was watching all the fireworks outside with my kids, and my 8 year old daughter asked me to explain what was Independence day all about. I gave her the story about colonial settlers under British rule and how we united with help to fight off the Brits and finally won our independence for the right to self rule. And when I told her that this is when our founding fathers wrote the Declaration of Independence, and she asked me what was that? I did not remember most of the words, but incredibly my wife did and we utter some of those magic words together. I told her that when I was a kid and read those words, I thought that they were the most beautifully written words I had ever read. And I told her that the meaning and values of that document was why I love America so much; this was the country that taught me what it meant to be equal and fair, good and just. But I also told her that half of it is no longer true, and my son, a typical Nintendo kid, interjected: “You mean, like Bush.” I did not even have to reply or convince him, somehow he already knew. In a way I should be glad that even my kids can see what is going on, but somehow I actually felt sad. Sad because they don’t know the full weight and tremendous implications of those words written so long ago. Sad because they don’t realize the power of words and the actions they can generate; and those specific words were so powerful that countless men have willingly died through the eons in their fleeting attempt to manifest and live out those words and its ideals. And sad because I grew up in a world full of idealistic ideas and enthusiasm, teaching us to not only help and improve ourselves, but all of humanity and mankind as well. Reaching the moon and back was just a small sampling to come. I am what I am is because of these words and it makes me sad to realize that my kids will not have these words and the absolute belief and trust in those very words inscribed by our founding fathers to guide and instill in them a sense of justice and equality. They know the world is not fair and they will never expect it to be fair. I have always hoped the world will be so, but I can no longer say this with a straight face to my kids that the world will be this way when they grow up or if it will ever even get any closer to those ideals; just like the moon is no longer feasible to travel to anymore, there is easy money to be made elsewhere subjucating the people of this planet.

    Reading the Declaration of Independence, and you can refresh your memory here: http://www.law.indiana.edu/uslawdocs/declaration.html

    After reading it, it struct me that I was wrong in telling my daughter that half of it was no longer true. I thought that more of it is not true than true. For brevity, skipping the preamble, just going through the grievances, I saw many justifiable grievance then that equally apply to now, the year 2006. Just read them for yourselves and see how many of them our government is guilty of or in the process of taking those very same rights away. I will mark the ones I feel they are guilty of.

    Guilty: He has refused his Assent to Laws, the most wholesome and necessary for the public good.
    Guilty: He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.
    Guilty: He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.
    Guilty: He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their public Records, for the sole purpose of fatiguing them into compliance with his measures.
    Guilty: He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.
    Guilty: He has refused for a long time, after such dissolutions, to cause others to be elected; whereby the Legislative powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.
    Guilty: He has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands.
    Guilty: He has obstructed the Administration of Justice, by refusing his Assent to Laws for establishing Judiciary powers.
    Guilty: He has made Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries.
    He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance.
    He has kept among us, in times of peace, Standing Armies without the consent of our legislatures.
    Guilty: He has affected to render the Military independent of and superior to the Civil power.
    Guilty: He has combined with others to subject us to a jurisdiction foreign to our constitution and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:
    Guilty: For Quartering large bodies of armed troops among us:
    Guilty: For protecting them, by a mock Trial, from punishment for any Murders which they should commit on the Inhabitants of these States:
    For cutting off our Trade with all parts of the world:
    For imposing Taxes on us without our Consent:
    Guilty: For depriving us, in many cases, of the benefits of Trial by Jury:
    Guilty: For transporting us beyond Seas to be tried for pretended offences:
    For abolishing the free System of English Laws in a neighbouring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies:
    Guilty: For taking away our Charters, abolishing our most valuable Laws, and altering fundamentally the Forms of our Governments:
    Guilty: For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.
    He has abdicated Government here, by declaring us out of his Protection and waging War against us.
    Guilty: He has plundered our seas, ravaged our Coasts, burnt our towns, and destroyed the lives of our people.
    Guilty: He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation and tyranny, already begun with circumstances of Cruelty and perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation.
    Guilty: He has constrained our fellow Citizens taken Captive on the high Seas to bear Arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.
    Guilty: He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages, whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions.
    In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.
    Nor have We been wanting in attentions to our British brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which, would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

    Ok that is enough for Independence day, and be sure to chech out all the political games at http://zenwire.com
    Take Care,
    Zenseeker

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