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Friday, 3 May, 2002, 14:41 GMT 15:41 UK
Greenspan urges accounting reform
Federal Reserve chairman Alan Greenspan
Greenspan: This would be an issue of national concern
Federal Reserve chairman Alan Greenspan has called for an overhaul of the way US companies enter stock options into their accounts.

Companies' failure to record options as expenses poses serious risks, Mr Greenspan warned a conference in Georgia.

"I fear that the failure to expense stock option grants has introduced a significant distortion in reported earnings - and one that has grown with the increasing prevalence of this form of compensation," Mr Greenspan said.

Stock options, which confer the right to buy shares at a pre-agreed price, are a tax-efficient way of complementing executives' salaries.

But since options are not cashed in until the day they are exercised, they are not expressed in a company's accounts - even though they are, in effect, outstanding liabilities.

Enron effect

The Fed chairman pointed to the Enron scandal as an illustration of the effects of distorted accounts.

"The seemingly narrow accounting matter of option expensing is, in fact, critically important for the accurate representation of corporate performance," Mr Greenspan said.

It would be more risky to leave the current accounting system in place than it would be to reform it, he said, adding that "this would be an issue of national concern".

US regulators are likely to take note of the starkly-worded warning from Mr Greenspan, the most senior figure in the US financial world.

The Federal Reserve chairman also suggested that stock options should be benchmarked more closely to companies' performance.

"Grants of stock or options in lieu of cash could be used more effectively by tying such grants through time to some measure of the firm's performance relative to a carefully chosen benchmark," he said.

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