MS and SEC reach cookie-jar deal

Show us lumpy quarters

ComputerWire: IT Industry Intelligence

Microsoft Corp has been ordered to "cease and desist" from future accounting violations as part of a settlement into a long-running investigation into alleged misrepresentation of the company's financial performance.

Redmond, Washington-based Microsoft has agreed to abide by US Securities and Exchange Commission (SEC) accounting and reporting regulations, under the agreement announced yesterday.

At the same time, Microsoft has neither admitted nor denied any wrongdoing - the standard means by which the SEC settles cases. No fine was imposed.

Microsoft's settlement contrasts sharply with Xerox Inc's recent SEC deal. In April, Palo Alto, California-based Xerox was fined $10m and agreed to revise its financial performance back to 1997, to settle allegations of accounting fraud.

The SEC avoids imposing fines in reporting cases, as it belies this only hurts shareholders. However, a spokesperson said exceptions occur in "aggravated" incidents - where it deems an offense "egregious".

In the case of Xerox, the SEC alleged the company "employed a variety of undisclosed accounting actions to meet or exceed Wall Street expectations and disguise its true operating performance from investors."

The commission said this accelerated Xerox's recognition of equipment revenue by over $3bn and increased its pre-tax earnings by approximately $1.5bn between 1997 and 2000. Xerox did not admit or deny the fraud allegations.

The SEC's unofficial investigation of Microsoft's spans July 1994 to June 1998. Officials investigated claims the company failed to accurately report earnings, carrying cash over from quarter to quarter to smooth out its growth curve - called "cookie-jar accounting."

"Microsoft failed to accurately report its financial results, causing overstatements of income in some quarters and understatements of income during other quarters," the SEC said in a statement.

The total balance of these accounts ranged from approximately $200m to $900m. The commission found Microsoft violated sections of the 1934 Securities and Exchange Act and ordered the company to "cease and desist" from committing future violations.

Microsoft said it will consent to SEC's order. The company said there would be no impact on Microsoft's reported financial results and no restatement of any reported results.

The SEC spokesperson also denied online reports the case was settled and record sealed after a federal judge had cleared the way for the case to go to trial.

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