There are many ethical issues that happen to suggest themselves while working with financial statements. Considering that the accounting system has similar features to the legal system, issues that emanate from both the legal system and the justice systems can be considered. By the fact that the systems are constructs of the society, behind them, one can find issues conforming to the morality of the individual and other moral values that are fundamental such as being truthful. In financial reporting in a company such as eBay, the following legal issues are hence pertinent.
There are ethical issues that emanate from process values and respecting the law. In this realm, people take procedures that are designed well and those that encourage respecting and obeying the law and consider them to be a good thing (Lyons, 1984). Considering this argument in accounting regulations, people who are called upon to apply regulations such as eBay’s financial procedures should respect the system or else there will be a likelihood of regulatory failures.
Before a financial decision is made to develop a standard, the standard-setting board needs to satisfy itself that the matter to be determined represents a significant problem and that the standard will not impose a cost on the many for which the benefits are few. If the proposal passes that first test then another test may subsequently be useful. If the choice maintains or adds to the firm’s general value it is satisfactory from a financial deliberation viewpoint or else it should be rejected. EBay’s management must have done a cost-benefit analysis of compensating its employees with stock option (non-cash) means as opposed to other modes of compensations. The implication of these is that the company derives more benefit through this method as opposed to another. The company would have required some huge cash outlay in compensating its employees than what it would have received had it issued shares may be to the public as a means of finance. The cost of this finance though would have cost the company rendering it cost-ineffective since the cost of finance should be less than the expected return from the project for which the finance is required. Furthermore, it would not have been readily available at the exact time the employees need to be compensated. Notice that the payroll expense on stock options of 2337 does not involve actual movement of cash hence does not affect the cash at the hand of the company. This implies that eBay will have adequate resources to clear its “short-term financial obligations” as soon as the time is due for payment (Bradshaw, 2004).
The use of the “fair market value” technique of accounting for employees’ stock options has a requirement that stock options be expensed at the value during the award date and not at what time that employee exercises his rights over the stock option. Therefore, all the costs emanating from transactions relating to employee stock options will have to be recognized in the financial statements and not merely making footnote disclosure in accounting for stock options. Since the compensation of the stock option is an expense chargeable against the gross profit of the company it impacts the income statement corresponding to that accounting period that the stock option was awarded. Therefore, the payroll expense on stock options of the year 2000 will be greater than 2337 and a subsequent decline in income from operations (Horngren & Harrison, 2007).
The reward of the stakeholders of the company is basically the dividends that are formally declared by the board of directors at the end of the accounting period. This is generally made subject to the company making a profit in the said financial year since the dividend is made out of the profit made. This method will definitely indicate a profit thereby guaranteeing the stakeholders of the company some dividend payment. It also promotes the fair market position of the company meaning that the market price of the shares of the company is likely to rise since the company is perceived to be profitable. The consistent application of this method will eliminate the risk inherent (fluctuating share price) when the employees exercise the right of sale of their stock option thus not influencing the share price in any way hence eBay share will be stable over time due to increased quality and reliability of reported earnings (Bradshaw, 2004).
Stock options are a non-cash means of compensation allowed for the executives and the employees of a company. These stocks also fall in the broad category of the common stock of the company. It is usually left at the discretion of the company to record and report the stock option either in the financial statement reporting or as a footnote to the financial statement. However, in the financial statements of the company the stock options should be treated as an expense to the company since it is compensation extended to its employees thus it does not receive any subscriptions from its release hence no income can be recorded from such transactions. Therefore reporting stock directly in the financial statements will include all the common stocks of the company but it is not the case with the footnote disclosure in accounting for stock options which will generally include only the stock that was allowed to the employees of the company as a form of compensation. In this case, it is a critical component of the expenses incurred by the company in its bid to reward its employees and therefore the fair value of these stocks should be reflected in the financial statements so that the correct position of the company is revealed since it is highly possible for the employees of the company to sell these stocks to get cash in exchange. When footnote disclosure in accounting for stock options is made it is usually in form of additional information that is generally in support of the data recorded in the financial statements, that is, a corollary of the financial statement reporting. On the other hand, the financial statement can never be made in support of the footnote disclosure in accounting for stock options (the reverse is not true). It can therefore be argued that footnote disclosure in accounting for stock options is made in a bid to enhance the qualitative nature of the financial statement information (its reliability, comparability and relevance). This is in relation to the chief objective of the financial reporting of the stock of the company. Footnote disclosure in accounting for stock options is however more detailed compared to reporting the stock directly in the financial statements as it will also indicate the circumstances and the conditions and the terms under which those stocks were granted to the employees. Furthermore, at the time of financial reporting footnote disclosure will show any stock option that is contingent (possible or remote) if it has still not been approved by the BOD and the management of the company which in the case of direct reporting in the financial statement cannot be revealed at all and hence will not be reflected in the income statement of the company as an expense meaning that the net income reported will be erroneous (Bradshaw, 2004).
Meg Whitman should change eBay’s accounting for stock options. Meg Whitman is an executive (employee) of eBay, Inc. and therefore distinct from the company. The assumption underlying the financial accounting structure of the economic entity states that the activities of a business enterprise should be kept separate and distinct from its owners and any other business unit. Meg Whitman should look at the future of the company and not the benefits or the losses that would accrue from the adoption of a new method of accounting for employee stock options. It is recommended that Meg Whitman change to the fair market value method of accounting for employee stock options since the company highly compensates its executives through the stock option. This being the case it is highly likely that the employees of the company can influence the market position of the company through the sale activities of the stock option. Under the fair market value method of accounting for employee stock options, the stock will be expensed in the income statement as at the grant date and not the exercise date. This is so because the stock option is an expense to the company that has to be charged against the gross profit of the company and thus impacts significantly on the reported earnings of the company. The use of this method will reflect the correct profit position of the company and based on this information the BOD can make a dividend declaration from an informed point of view (Bradshaw, 2004).
Reference List
Bradshaw, M. T. (2004). EBay, Inc.: Stock option plans (A), Harvard Business School Accounting Cases. Boston: Harvard Business School Publishing.
Geam, C., Rider, M., Rutherford, M. & Semann, L. (2007).Ethics of Stock Option Backdating. Web.
Horngren, C. T., & Harrison, W. T. (2007), Accounting (7th edition), Upper Saddle River, NJ: Pearson Prentice Hall.
Lyons, D. (1984), Ethics and the rule of law, Cambridge University Press.
Solomons, R. (1993) “Corporate roles, personal virtues: an Aristotelian approach to business ethics”, in E.R. Winkler and J.R. Coombs (eds), Applied ethics: a reader: 201-221.