Recent accounting scandals have cast a shadowover the credibility of corporate finances. As aconsequence, companies are greatly increasingtheir efforts to ensure that financial reports arepresented in an accurate and transparent mannerto gain investor confidence.
Meanwhile, Congress has rushed to pass misguided legislation on financial reporting. New rules may also be issued by the Financial Accounting Standards Board, which sets the nation's "generally accepted accounting principles" (GAAP). For example, FASB is considering damaging changes to the treatment of stock options. Congress is also considering stock option legislation, with its eye set more on populist politics than on sound financial accounting.
New mandates threaten to move accountingfurther away from commonsense business realities. In recent years, flawed FASB rulings have ledto the growth of alternative pro forma financialreporting in Silicon Valley. In fact, 74 percent ofsemiconductor companies now also report withpro forma financial statements because GAAPrules no longer provide an accurate measure ofcompany performance for investors.
GAAP rules for mergers and acquisitions havecaused particularly large misrepresentations of corporatefinances. Further serious problems will becreated for Silicon Valley companies if expensing ofstock options is mandated. FASB and Congressmust be more sensitive to the damage their rulemaking can cause to financial statement accuracy. Ifthey are not, it will hurt the efficiency of the country'sbusiness and financial decisionmaking andweaken the powerful engine of free-market capitalismthat propels the U.S. economy.