DeLong: CJR's The Audit misses on options scandal

Cal-Berkeley economics professor Brad DeLong criticizes Felix Gillette of the Columbia Journalism Review’s The Audit blog for misunderstating the problem with backdating stock options at companies. The issue has been gaining a lot of business section coverage in recent months, but Gillette argues that it is overblown.

Gillette wrote: “This is kind of like saying: buying alcohol at the store, while not illegal in itself, could result in drunk driving. What would happen if a powerful paper in a close-knit community published the names of everyone in town who had recently bought alcohol as part of a larger story about a widening drunk driving scandal? Chances are, other people in the community would soon start wagging their tongues and pointing their fingers at the people on the list — which is exactly what has happened to the companies fingered by the Journal.”

“Ever since its initial report was published in March, various other news organizations around the country have piled on with perfunctory Enron-references, overblown talk of a widening scandal, and self-serving quotes from members of Congress who are just shocked and simply outraged at the smug, reckless, behavior of overly entitled college athletes.”

DeLong disagrees. He wrote, “No. It’s not like that at all.

“The key phrase is ‘could result in false disclosure.’ A company that issues an in-the-money option has always needed to account for the option as employee compensation. A company that backdates an in-the-money option to make it look like an out-of-the-money option has falsified its income statement–done, on a much smaller scale, what WorldCom did in claiming high profits by classifying operating expenses as investments in capacity.

“CJR has limited credibility. It doesn’t need to have Felix Gillette burning it this way.

“Reclassify Felix Gillette as UNRELIABLE. Reclassify CJR Daily as LACKING QUALITY CONTROL”

Read more here.