News Release

October 25, 2002

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Federal Accounting Standards Blur Reality
FASB rules and federal legislation often make matters worse for investors

WASHINGTON -- The Financial Accounting Standards Board and the federal government try to make corporate financial reports more useful to investors. But, according to a new report, current and proposed accounting rules blur reality and confuse potential investors.

In a new Cato Briefing Paper, "Corporate Accounting: Congress and FASB Ignore Realities," author T.J. Rodgers, president and CEO of Cypress Semiconductor Corporation, explains why many corporations, including his, use alternatives to the mandated accounting procedures to more accurately show their financial situation.

According to a PricewaterhouseCoopers survey, 74 percent of semiconductor companies issue pro forma earnings statements in addition to the required "generally accepted accounting principles" (GAAP). Rodgers argues that this is because GAAP rules for such items as mergers and acquisitions create "a complicated and misleading result." GAAP accounting standards require companies to use "purchase accounting," a complicated method that can make it appear that an acquiring company has losses, when in actuality, the company has positive earnings.

Stock option legislation proposed by Sens. Carl Levin (D-Mich.) and John McCain (R-Ariz.), and stock option rules under consideration by the FASB, will make GAAP financial reporting even less accurate, according to Rodgers. The proposals aim to require companies that offer their employees stock options as part of a benefit package to expense them. Essentially this would make the companies pay for the options twice -- by reducing profits on the income statement and again by lowering earnings per share through dilution. This would further cloud the reality of companies' finances.

Rodgers concludes, "corporate accounting needs reform, but not in the direction that FASB and Congress are moving." He further notes that the goal of reform "should be to bring transparency and accuracy back to financial statements," rather than make them more misleading and confusing.

"Corporate Accounting Congress and FASB Ignore Business"