Late To Accelerate

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On April 14, the SEC overrode the crypto trust on the implementation of Statement 123(Revised), making it effective for calendar year registrants in 2006, while fiscal year filers still had to implement it.
Prior to the SEC’s interference, there had been a run on accelerating the vesting of underwater stock options: managements clearly had wanted to eliminate as much future expense as they could. They coaxed their boards into approving early vesting acceleration to push all the associated option compensation into the footnotes before Statement 123(Revised) went effective.
Once the SEC’s action was announced, there was a decrease in the volume of companies hitting the accelerator. They might be postponing work they intend to do later; or they might believe that the SEC’s action might lead to a more permanent ditching of the standard.
A week after the SEC’s interference, however, a couple of smaller firms announced accelerations: one which made complete sense (from the point of view of someone trying to evade accountability, that is), because it has a June 30 year end and will have to employ Statement 123 (Revised) quite soon. That firm was little SBS Technologies. Interesting phrasing in their 8-K on the rationale for the move: “In response to SFAS 123R, on April 21, 2005, the Board of Directors of SBS approved the acceleration of the vesting of all outstanding unvested stock options with an exercise price greater than $9.22 (the Acceleration)…SBS’ decision to accelerate the vesting of these options was in anticipation of compensation expense to be recorded subsequent to the effective date of SFAS 123R on July 1, 2005 in connection with outstanding unvested stock options issued to employees.”
No bones about it. “We did it because we don’t like 123R.”
The other acceleration took place on the same day as SBS Technologies’ at somewhat larger Sinclair Broadcast Group. And their rationale was almost as forthright: “The decision to accelerate the vesting of all unvested options, which the Company believes to be in the best interest of its shareholders and employees, was made primarily to reduce compensation expense that would have been recognized in future periods following the Company’s adoption of Financial Accounting Standards Board Statement No. 123, “Share Based Payment (revised 2004)” (“FAS 123R”)… The acceleration of vesting will reduce the Company’s compensation expense related to these options by $0.8 million (pre-tax) in aggregate for the years 2006 through 2008, the original remaining vesting period.”
Every penny counts. At least when it comes to not recording compensation expense.
Will companies continue their acceleration binge? There’ll probably be a steady stream of the fiscal year companies accelerating them; there’s yet to be acceleration news from one of the really big fiscal year “expensing opponents” like Cisco. If something like that happens, there’s bound to be a flood of “me too” actions. For now, though, it looks like the calendar year companies are taking a rest – Sinclair, so far, is an outlier. Maybe the calendar year firms will continue to rest until the fourth quarter, if it looks like Statement 123R is going to live. And a lot of that will depend on how well HR 913 does between now and the end of Congress.
Deloitte In The Doghouse
Yesterday, Deloitte announced its settlement with the SEC for its role as auditor in the Adelphia Communications and Just For Feet frauds. That press release is quite a bit different in tone from the SEC’s release on Adelphia and Just For Feet; it all depends on your point of view.
The Deloitte version of the event focuses on “global” blame. According to Deloitte USA CEO James Quigley: “These cases raise a larger issue facing the auditing profession. Among our most significant challenges is the early detection of fraud, particularly when the client, its management and others collude specifically to deceive a company’s external auditors. Deloitte & Touche LLP has implemented, and will continue to implement, a number of additional improvements in its policies and procedures for auditing clients in its risk management program and to aid in uncovering fraudulent activity in a more timely manner.”
And the SEC was unsparing in its criticism of Deloitte’s failings. Regarding Adelphia: “What is especially troubling here is that Deloitte recognized the risk of fraud posed by this client at the outset. When auditors turn a blind eye toward misconduct on a high-risk client and allow a fraud of this magnitude to go undetected, the consequences will be severe.” Regarding Just For Feet: “Auditing firms and their personnel are responsible for exercising professional care and maintaining skepticism in auditing financial statements, particularly when the company is identified as having a high risk of potential fraud… Shareholders depend on auditing firms as a check on the honesty of management. They are expected to respond appropriately to wrongdoing, adequately test the claims made by management and complete the work supporting the audit before issuing an audit report.”