Schuetze wary over CPA independence on stock option proposal.

Walter Schuetze, chief accountant of the Securities and Exchange Commission, said it was "very troubling" that "CPAs may have become cheerleaders for their clients" on a number of accounting issues, especially the Financial Accounting Standards Board's proposed statement on accounting for employee stock options.

Schuetze, addressing the American Institute of CPAs National Conference on Current SEC Developments, said most large CPA firms had supported adding a charge to earnings for compensation costs and employee stock option expenses when FASB first raised the issue in the mid 1980s.

However, Schuetze continued, even before the FASB released an exposure draft on the issue last June, the largest national firms reversed themselves and "joined forces with certain members of industry" to recommend against recognizing stock options formally.

"Such a change in position," Schuetze said, "left members of the public with the impression the switch was in response to a fear of losing clients or other forms of retaliation." He asked, "If public companies are pressuring their outside auditors and the accounting standards executive committee (AcSEC) of the American Institute of CPAs to take particular positions on financial accounting and reporting issues and outside auditors are subordinating their views to those of their clients, can the outside auditor community continue to claim to be independent?"

Schuetze continued, "Could such a trend be anything other than an invitation to Congress, the SEC and other regulators to regulate more heavily, and more directly, the auditing profession in particular and financial accounting and reporting in general?"

AcSEC supports its position. AcSEC chairman Norman Strauss, a partner of Ernst & Young in New York City, disagreed with any characterization of AcSEC's decision to oppose stock option accounting as resulting from outside pressure. "We deliberated on the issues at a public meeting," Strauss said. "The discussion took place in good faith. We disagreed with FASB's conclusion principally because we think the information generated by option-pricing models is too subjective and is not sufficiently reliable to be helpful. Our decision reflected what we thought was right." (See box on page 9 for excerpts from AcSEC's comment letter.)

Although in the 1980s AcSEC had asked FASB to consider changing the model for stock option accounting, Strauss said when it studied FASB's proposal the committee concluded "it would not be an improvement over current practice." Strauss also noted that AcSEC's membership has changed over the years, and current members were not those who originally had asked FASB to consider the change. As a committee member, he opposed stock option accounting throughout the entire process.

AcSEC COMMENTS ON FASB'S STOCK OPTION PROPOSAL

In a comment letter to the Financial Accounting Standards Board, the American Institute of CPAs accounting standards executive committee (AeSEC) explained why it opposes FASB's proposed statement Accounting for Stock-based Compensation. Excerpts from the letter, signed by AcSEC chairman Norman N. Strauss and Robert S. Kay, chairman of AcSEC's stock-based compensation task force, follow:

"The exposure draft proposed that compensation cost should be recognized for all stock-based compensation paid to employees. A majority of AcSEC [9 out of 15 members] disagrees with this proposal... because

1. The models used to calculate the fair value of such options were designed for use with traded options.

2. The expense amount for such options based on these models cannot be validated by reference to transactions with third parties ....

"This majority concludes that the usefulness of financial statements for investment and credit decisions will not be improved by including... the expense amounts determined under these models. It believes current or improved disclosure requirements will inform financial statement users adequately about fixed stock options granted to employees ....

"AcSEC continues to believe methods other than a minimum value method will not produce reliable results that can be compared among similar enterprises. However, a majority of AcSEC believes the minimum value method described in the exposure draft does not produce 'fair value' and may not be an improvement over the current requirements contained in Accounting Principles Board Opinion no. 25, Accounting for Stock Issued to Employees.

"While a majority of AcSEC reached the conclusion that the fair value issue remains intractable, AcSEC continues to support fair values in concept. If such values become more objectively determinable through changes in the structure of options, AcSEC will reconsider its views ....

"Accounting for stock-based compensation is a complex and controversial issue. AcSEC commends the board for its thorough and thoughtful study of this issue. While opinions may differ on the best answer to the stock-based compensation question, AcSEC vigorously supports the board's activities and its standard-setting efforts on behalf of the private sector."