NEW YORK -- Intel Chief Executive Craig Barrett opened a new front in the fight against treating stock options as an expense Wednesday, suggesting that CEOs should consider refusing to certify financial results if forced to follow a rule they consider inherently flawed.
Barrett's comments mark the first time a major U.S. company, let alone the world's largest microchip maker, has argued that civil disobedience could be a suitable response to such a rule. The remarks, which appeared in an opinion piece in The Wall Street Journal, came as accounting rulemakers are moving quickly to mandate stock-option expensing.
"I know of no situation where it would be acceptable for a CEO to certify that a company's results were 'kind of right,"' he said, quoting a phrase he said Robert Herz, chairman of the Financial Accounting Standards Board, used to describe the results of stock options calculations.
The most widely used model for valuing stock options, the so-called Black-Scholes model, fails to give an accurate portrayal of the value of stock options, Barrett wrote. A stock option gives the recipient the right to buy shares at a fixed price any time before they expire.
By swearing by options calculations, he said, executives might end up breaking the Sarbanes-Oxley Act, passed in the aftermath of the accounting scandal that brought down Enron, which requires executives to swear that their financial statements are accurate.
"If stock-option expensing becomes reality, it leaves CEOs with two options: Comply with Sarbanes-Oxley and certify as accurate numbers that are inherently flawed," Barrett wrote. "Or, support the spirit of the new law and refuse to sign off on the numbers because we don't believe they present an accurate financial picture."
The technology industry, which relies on stock options to attract and motivate employees, has long fought against efforts to treat stock-option costs as a regular business expense since doing so would pummel earnings at several tech companies. In the mid-1990s, the tech sector used its political muscle and fierce lobbying to beat back such a proposal from FASB.
"The people opposed to expensing options are looking for any way they can possibly find to support their position and raise concerns about expensing," Dennis Beresford, who headed FASB when it took up the stock options issue in the mid-1990s, said about Barrett's latest comments.
Initially, the tech industry argued that expensing stock options would force companies to rein in options grants and hurt rank-and-file employees toiling in Silicon Valley. Lately, technology companies have pointed to the difficulties in valuing stock options as the main reason why they should not be expensed.
FASB, which has added a project on stock options to its agenda and on Tuesday agreed it would focus on treating options as an expense, has said it will try to find a better way to value options, if possible.
Barrett said the rules would have had an enormous effect on Intel's reported results for the years from 1995 through 2002.
"If we had been required to expense options using Black-Scholes during this period, we would have expensed over $3 billion just for the portion of those options where the price is currently underwater," he said. Options are called underwater when their exercise price is higher than the current market price.
"These options may never be exercised unless the stock price increases in the future -- yet we would have to carry their 'value' as an expense," Barrett wrote.
