Financial Accounting Blog

Friday, June 11, 2004

How Options Fueled the Enron collapse: A 2002 episode of the PBS series Frontline argued that the failure to expense the cost of stock options contributed to the collapse of Enron.
[Sarah Teslik, Executive director of the Council of Institutional Investors] "had FASB changed the rules and required companies to show stock options as an expense, I think Enron and a number of the other companies that have tanked through fraudulent bookkeeping would have been held back considerably, because their schemes depended on postponing public revelation of the losses. And if stock options had to show up as an expense, then a lot of the money that was quietly being siphoned off would have been publicly siphoned off, and it would have been a deterrent.

Since this Frontline aired, FASB has again proposed that all companies must expense the value of stock options paid to employees as compensation. As noted here not everyone agrees that this is the best thing to do.