Case study

When auditors became lobbyists

Summary

During the beginning of 1990, there was series of controversies that blinded the Financial Accounting Standard Board (FASB). This initiated the FASB to propose a new accounting rule for businesses to identify and mention their compensation expenses for specific stock options when these are settled with executives and top management of the companies. There was great disagreement in business society and even in government bodies against this proposal. Some said that this rule would stop the growth of the business; it reduces the opportunities of the businesses to grow.

With the proposal of FASB for accounting of compensation expense for particular stock options that are offered to the executives and other company employees as compensation. This created huge distress in business society and government bodies. It is noted that most of the peoples that are against it was business executive who in future most likely to lose such opportunities. In most of companies stock options are used to pay their top executives with stock options at predetermined price, and when these options is exercised it also benefits the company by increased market price of the stocks. This strategy was initially implemented by Chrysler, who used to pay its one of the top executive with stock options and 1$ pay. Businesses saw this approach to pay the executives with ease particularly for the businesses that are new or at establishing stage. FASB used non-accounting approach for recording such expense and use economic value of the stock for recording purpose at the issuing date. However, businesses found it difficult to compute such value and FASB addressed this issue by using option pricing model which undertake various factors into account for computing the value of the option. This provided base for those who are against this proposal. They identified two major problems in this proposal; first is development of economic value and second is that it creates hurdle for the businesses that are at starting stages.

On the other hand supporter of FASB's proposal pointed to various events in the past which affected the economic health of the nation. These arguments were countered by some examples that benefits who are against that proposals. A financial analyst who is in the favor of the proposal by FASB argued that if business is compensating their employees with options, than this must be recorded on the expense account. In addition to this major six accounting companies entered into argument and wrote to FASB to withdraw the proposal. They are criticized by the Walter Schuetze, and it is also found that during 1970s prominent accounting firms lobbied with rule making bodies and senate and dictated rules that harmonize their clientele.

Al last in 1994, it was observed that FASB withdrew the stock option proposal. They brought accounting based stock option compensation computing method (Knapp, 2006).

This case study shows that how big businesses influence the decision making of the regulatory body. It also shows the influence of auditing firm on the regulatory ...