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PeopleSoft shuns options expensing

In a widening rift over stock options accounting among technology companies, the software maker says it has no intention of deducting stock options as an expense against earnings.

In a widening rift over stock options accounting among technology companies, software maker PeopleSoft said Monday that it has no intention of deducting stock options as an expense against earnings.

Amazon.com, Computer Associates and some 30 other American corporations recently decided for the first time to expense options they grant to employees in the face of negative investor sentiment over stock options abuse.

"Amazon may have their own reasons, as does CA," said Kevin Parker, chief financial officer at PeopleSoft in Pleasanton, Calif. "The important issue is that the current crisis in confidence is not about stock option plans but about CEO compensation and corporate governance. Stock options are a very powerful tool for aligning shareholder value with the creative talents of employees."

PeopleSoft joins Intel, Cisco Systems and Microsoft in voicing opposition to hotly debated proposals that companies be required by law or regulation to expense options. Those companies are at odds with the powerful chairman of the Federal Reserve Board, many members of Congress and some investors, including Warren Buffett, who argue in favor of changing how stock options are expensed.

Stock options are widely used among U.S. companies to hire and retain employees, and are a particularly popular perk in the fast-paced technology industry for workers at many levels.

At PeopleSoft, for example, more than 80 percent of 8,500 employees have been granted stock options, with senior management holding less than 12 percent of the total, the company said.

Calls for changing the way Corporate America accounts for options-related expenses have been rekindled by accounting scandals roiling the energy and telecommunications industries. Proponents of requiring companies to list stock option as expenses say that investors need more clarity in determining the financial health of a company.

But opponents of the change, such as PeopleSoft, say investors already have the clarity they need to judge the financial health of a company because public companies are required once a year to report in regulatory filings the impact of stock option programs on their finances.

For instance, PeopleSoft's earnings report would have been different if the company had expensed stock options in its annual filing to the Securities and Exchange Commission for 2001. PeopleSoft would have posted earnings of $67 million instead of the $191.6 million that it reported.

Because of the impact on reported profits, PeopleSoft and other technology companies would be forced to scale back their generous allotment of stock options, to the detriment of employees, the company and shareholders, Parker said. Parker argues that such a consequence would be particularly damaging to technology companies that rely on stock options to motivate employees to constantly innovate and keep pace with frequent changes in technology.

The U.S. Senate tried and failed to change the accounting rules last month, but more legislation related to the treatment of stock options has already been proposed. Senator Joseph Lieberman, D-Conn., introduced earlier this month a bill to encourage companies through tax benefits to distribute options more equitably among executives and rank-and-file workers. The bill, which doesn't require the expensing of options, also urges regulations that would forbid executives from selling their shares while still employed by their company and would require shareholder approval of stock option plans.

Meanwhile, the Financial Accounting Standards Board (FASB), which sets accounting rules in the United States, is considering setting new regulations around stock options accounting. A board that will eventually set accounting rules for the European Union has already taken a step toward requiring the accounting change.

Parker said that he and PeopleSoft Chief Executive Craig Conway are prepared to personally vouch for the accuracy of the company's recent financial statements, as required by a Securities and Exchange Commission order handed down June 27. The chief executives and chief financial officers of nearly 1,000 major companies are required to certify their financial statements to the SEC by Aug. 14. Executives at Siebel Systems and Oracle have already sworn under oath to the accuracy of their company's financial statements.

"We will file the appropriate documentation on time and on schedule," Parker said. "We?re very glad to do that and well prepared."