Stock Option Scandal – Now On To The Accounting

While the daily headlines are focused on the conduct that has resulted in the recent stock option scandal and the scandal’s effect on corporate leaders, CFOs, controllers, and others in the finance trenches must be concerned about how to properly report previously issued financials that contain accounting errors. The errors are bad enough, but now introduce the overwhelming task and expense of restating prior financials for what could be several years on end, and the possibility of getting the restatement accounting wrong, which may lead to multiple restatements.

To aid registrants in this dilemma, this week Carol A. Stacey, Chief Accountant Division of Corporation Finance, supplemented the staff’s prior guidance on the accounting for such errors issued September 19, 2006 and posted a sample letter to CFOs providing guidance to companies on disclosing and filing such errors. Available at http://www.sec.gov/info/accountants/staffletters/fei_aicpa091906.htm (9/19/06 guidance); http://www.sec.gov/divisions/corpfin/guidance/oilgasltr012007.htm (1/16/07 guidance, mislabeled by the Commission as a oil/gas letter).

The letter offers that the staff will not require amendment of prior filings if the “company amends its most recent Form 10-K and includes in that amendment [a] comprehensive disclosure” that follows 10 requirements and subparts, explicitly detailed in the letter. None of the requirements are surprising and they do more to provide acceptable uniformity. The requirements follow known rules of restatement and accounting, i.e., requiring compliance with Items 301, 302 and 303 of Regulation S-K; FASB Statement 123 (Accounting for Stock-Based Compensation); and APB Opinion 25, Accounting for Stock Issued to Employees.

Not surprisingly, the staff reserves the right to review and comment on all filings and, specifically, states that adhering to the guidance does not “foreclose any action recommended by the Division of Enforcement under Section 304 of the Sarbanes-Oxley Act, Forfeiture of Certain Bonuses and Profits, with respect to the periods that the company’s financial statements require restatement, irrespective of whether the company amended the filings to include the restated financial statements.”