TechNet commends Congress and the President for enactment of the Sarbanes-Oxley Act, an important step towards improving corporate governance. The technology industry will continue to support thoughtful and reasoned responses to issues of corporate accountability, while preserving accounting standards that serve investors and encourage broad-based employee ownership and economic growth.

TechNet firmly believes that mandatory expensing of employee stock options would not produce more accurate financial statements or curb corporate abuses. To the contrary, mandatory stock option expensing will (1) produce less accurate financial statements; (2) reverse the trend toward broad-based employee ownership; and (3) undermine a tool that has fueled innovation and growth in the U.S. economy.

Mandated expensing would reduce the reliability and comparability of financial statements.

Many accounting experts agree that employee stock options do not represent an expense. There is no real cost incurred by a company when it issues stock options to its employees, because a promise to issue options or shares in return for a promise to provide services in the future does not meet the accounting definition of a liability.

Further, there is no accurate and reliable method of valuing employee stock options. Black-Scholes was not designed to value employee stock options - it was designed for the short-term trading of liquid, market-listed options. Employee stock options typically have long vesting periods and are subject to intense stock market volatility. As Professor Burton Malkiel, professor of economics at Princeton, and Professor William Baumol, professor of economics at New York University, wrote in The Wall Street Journal, "there is no way to measure the ‘cost’ - the value of the options at the time they are granted - with reasonable precision." Malkiel and Baumol added: "Because employee stock options have durations of five to 10 years, are complicated by not vesting immediately, are contingent upon continued employment and subject to various restrictions, it is virtually impossible to put a precise estimate on the option’s value." The Wall Street Journal, April 4, 2002.

Mandatory expensing will distort financial statements because any "cost" associated with stock options is already reflected in earnings per share. Reducing net income when employee stock options are granted will result in an inaccurate "double charge" in the financial statement.

Mandated expensing will threaten the trend toward broad-based employee ownership.

Increasingly, stock options are being granted to employees at all levels, not just top executives. Nearly 10 million Americans have received stock options according to the National Center for Employee Ownership. Mandatory expensing will threaten this important trend.

A central goal of post-Enron reforms is to limit "abuse at the top" without penalizing the rank-and-file worker or reversing the positive national trend toward broad-based employee ownership. Expensing stock options would do exactly the opposite - expensing would likely eliminate the use of options for middle management and rank-and-file workers, as many companies that widely distribute options will be deterred by the prospect of a significant and distorted impact on earnings.

Investors should have accurate and timely disclosures about employee stock options.

The technology industry has called for greater disclosures about employee stock options that build on the Sarbanes-Oxley Act. Over 30 TechNet and AeA member companies have adopted comprehensive quarterly disclosures about stock option plans including the number of options granted and outstanding, the full dilutive effect of all options on earnings per share, and information as to option exercise dates. This data is being provided in a separate and distinct section of annual reports or proxy statements and quarterly reports.

TechNet supports reforms and enhanced disclosures that will curb corporate abuses without undermining the use of employee stock options - a tool that has fueled innovation, contributed to U.S. economic leadership and given millions of average Americans a stake in the success of their companies.