Tech Firms Hide Payroll Taxes on Employees' Stock Options
Wall Street Journal (09/07/00) Vol. 2, No. 4 p.C1; Mangalindan, Mylene; McGough, Robert

In quarterly earnings announcements, technology companies such as BEA Systems, Yahoo!, and Cisco Systems, are highlighting a net-income figure that leaves out the payroll taxes they must pay to employees when employees exercise their stock options. By excluding the expense of the payroll taxes, companies look more profitable, which is necessary for survival in the heavy stress of today's stock market. The companies announce their pro-forma earnings at the top of their earnings releases, and the pro-forma number can either include or exclude any revenues the company desires, because accounting rules only apply to the official-income figure that appears later in the earnings release. Pro-forma earnings are, consequently, predictably higher than the official-income figure. Some expenses, such as acquisition costs, are reasonably excluded, since they are not recurring, and thus would only hamper investor's understanding of how a business is performing. But payroll taxes, while representing only a small portion of income for the companies that leave them out, could greatly effect a stock price. The SEC is responsible for regulating pro-forma income, but it does not "have specific rules that go to presentation of alternative measures of performance," according to Robert Bayless, chief accountant in the division of corporation finance, who added that rules against "presenting misleading or unbalanced information applies to these sorts of things."

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