(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Top UK Regulator Favors Expensing of Options

At a time when opinion on the accounting treatment of stock options remains divided, Chairman Howard Davies of the Financial Services Authority has expressed strong support for the expensing of options. While recognizing the complex issues surrounding the appropriate valuation methodology, Chairman Davies emphasized that options are a cost to the business and that cost must be recognized. Similarly, he believes that, if a company has an obligation to make good a deficit in its pension scheme, the true cost of that obligation should also be recognized.

In remarks at the recent NASD symposium on the global adoption of international accounting standards, Mr. Davies said that global standards will only work if they are principle-based since it is neither realistic nor desirable to try to write detailed rules for universal application in more than 150 countries. In turn, the success of principle-based standards depends on three key corporate governance controls. First, senior corporate management must want to get the right answer. Secondly, independent auditors must be aware of their broader public role in support of efficient capital markets and the interests of investors. Finally, there must be an independent-minded audit committee to monitor the relationship between management and auditors.

Noting that it has become a cliche' to say that the U.K. accounting regime is based on principles while the U.S. regime relies on black-letter rules, Chairman Davies detects the clear emergence of a consensus view on the standards issue as U.S. securities regulators move away from a check-the-box approach to financial reporting. In his view, the debate about the relationship between principles and rules is linked to the notion of the true and fair override, which he described as "dear to the hearts of all British accountants," who tend to believe that such a thing is unknown in North America.

But Chairman Davies is not so sure that the distinction between the two approaches is as sharp as some have suggested. In this regard, he cited the 2nd Circuit opinion by Judge Friendly in U.S. v. Simon (1968-70 CCH Dec. ¶92,511), which has recently been revived by the SEC. In rejecting the auditors' claim that criminal charges were foreclosed because the financial statements literally complied with GAAP, Judge Friendly held that, if literal compliance with GAAP creates a fraudulent or materially misleading impression in the minds of shareholders, the accountants could, and would, be held criminally liable.

The accounting profession has not universally applauded this view, said the chairman, but Article 203 of the Accountants Code of Professional Conduct says that auditors may depart from GAAP to prevent financial statements from being misleading. According to Mr. Davies, this rule may need to be dusted off and reinvigorated. In addition, while the way in which this potential override is applied in different jurisdictions remains materially different, he can see the germ of a useful additional degree of convergence that can buttress the move to international accounting standards.