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Stock Option Accounting

Enron Company used over the counter derivatives in order to be able to hide that nature of what it was doing to make money. Today many former employees, retirees and investors are paying the price of their company’s desire to operate confusing, murky and unregulated transaction. (Enron Watchdog) The stock option accounting loophole has caused misallocation of capital in favor of companies that understate their compensation costs. It has also resulted in the over reliance on stock options at the expense of other forms of compensation which are executive which better align with the management interests with those of the shareholders.

Many companies such as GAP Inc. have said that they are reluctant to use he stock options which are performance based which are indexed by their competitors. This is because indexed stock options must be expensed under the accounting rules which are workable at that specific time. (Constable) Stock options grants to the executives create perverse incentives which are not in the best interests of shareholders who are long tem unlike ownership of shares which is real. Stock options encourage executives to take business risks which are excessive.

They do so by promising executives all the benefits of increase in prices of shares with none of the risks of price decline of the shares. Stock options reward decision making which is short term. This is because stock options can only be exercised just one year after the grant date. By timing when to exercise their stock option the executives can also get profits from share price vitality. (Financial Accounting Standard Board) The accounting rule can be improved by simplifying whenever possible. This can be done by ensuring that all entities follow the same standards of accounting.

This can also be done by eliminating the opinion 25’s intrinsic value method together with its related form driven and detailed implementation guidance because it simplifies the authoritative literature. The rules of accounting can be improved by making sure that they address the concerns of the users as well as others. The rules can also be improved by eliminating other alternative accounting methods. This will ensure that only one standard method is used and thus the financial statements will be uniform in all the companies.

The accounting rule can also be improved by converging with international accounting standards. (Financial Accounting Standard Board) Loopholes in the accounting rule can be devastating to the recent employees, retirees, investors and others. It is therefore necessary to close them in order not to affect any person. The loopholes are also utilized by companies to reflect their financial statements in a way that they would like them to reflect and thus it is necessary to close them.

Works Cited Constable, S. Stock Option Accounting Loophole . 17 September 2005 . 5 December 2008 <http://journalism. nyu. edu/pubzone/theoryb/node/391>. Enron Watchdog. Investors and Consumers Corporate Responsibility. 5 March 2004. 5 December 2008 <http://www. enronwatchdog. org/topreforms/topreforms8. html>. Financial Accounting Standard Board. Summary of Statement . 2004. 5 December 2008 <http://www. fasb. org/st/summary/stsum123r. shtml>.