SEC Speaks Stock Options; Holdouts React

Flubbing The Footnotes

It’s annual report season: hopefully you’re one of the studious types that actually reads ‘me cover to cover, with emphasis on the footnotes because it’s the only time of the year they’re actually filled with information.

Uh-oh. There’s this disturbing story in the Wall Street Journal: “Study Finds Errors In Footnotes Less Likely To Get Fixed.” It seems a trio of enterprising professors from Cornell University and Bentley College tested auditors’ reactions to discovering errors in footnotes as opposed to errors embedded in financial statement figures. An excerpt:

“In one experiment, auditors were asked how they would handle a company that had underestimated the cost of employee stock options, but objected to making any adjustment. Some auditors were told the firm included the cost of stock options on its income statement; others were told the cost was shown only in a footnote.

Even though the size of the error was the same in both cases, amounting to about 4.6% of net income, auditors had very different reactions. When the error was on the books, auditors called for a full or nearly full correction on average. When the error was in the footnote, the auditors rarely called for any correction.”

As we trudge toward recognition of stock compensation recognition in the second half of this year, this study has to make you wonder about the quality of the “pro forma” Statement 123 information contained in the footnotes since 1996.

For Procrastinators Only: Compliance Tips On Statement 123 (Revised)

Associate Melissa crypto Custodian turned up this titbit from compensation consultants Pearl Meyer & Partners: a list of “10 Critical Steps Companies Should Take Today” to meet the pending implementation of Statement 123 (Revised).

Hello? It’s March 29 – and firms should just now be figuring out the critical steps in implementing Statement 123 (Revised) in three more months? Section 404 reviews have certainly been a distraction, but interested parties should have seen this train coming for years.

The checklist is an excellent blueprint, for sure: chock full of detailed steps that every controller, CFO and HR honcho should have hashed out together many months ago, unless they were in full denial mode. And some of them are creepy but expected, in terms of earnings gamesmanship: “Build Your Case: Develop Assumptions — Determine what works best for your company” and “Size the Problem: Projecting Your Expense/Dilution” kind of say it all.

Pearl Meyer is in the business of planning compensation plans: if they’re issuing this kind of business-generating advice now, I’m wondering if it means they know just how unprepared firms really are. Any CFO who prints a copy of this checklist and starts worrying now should perhaps check this link and recite the creed. After all, there’s still a full three months before the standard goes into effect.

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