Feature: IT accounting under the gun: the hit list
- 14 March, 2002 08:45
The list of companies either known or believed to be under investigation by the U.S. Securities and Exchange Commission (SEC) for accounting irregularities is still growing. Here are some examples:
-- WorldCom Inc. revealed an SEC request Monday for a wide range of documents relating to its corporate accounting and its revenue recognition policies. The SEC asked about a US$685 million loss taken in the third quarter of 2000 for accounts written off as uncollectible, and documents relating to loans made by WorldCom to officers or directors, according to the letter on WorldCom's Web site. WorldCom said it suspended employees at three branch offices in February after discovering some had allegedly booked phony commissions, and WorldCom lent Bernard Ebbers, chief executive officer, millions in order to keep him from selling off company stock in a margin call earlier this year.
-- EMC Corp. fired two managers in its Chicago field office earlier this quarter amid an SEC investigation into the data storage company's business practices. A former EMC executive accused the company of improperly booking revenue with some customers.
-- Enterasys Networks Inc., a network equipment maker, fired three managers in its Asia-Pacific region last month after a financial officer in the company's New Hampshire home office discovered that two version of a $4 million contract had been drafted for a sale -- one for the auditors and one for everyone else. The company has delayed release of its fourth-quarter financial results until the end of March in order to straighten out its books and to confer with the SEC.
-- Qwest Communications International Inc. disclosed last month that it received a request for documents from the SEC relating to its transactions with Global Crossing, and confirmed Monday that Qwest itself was the subject of an informal inquiry. The SEC probe into Qwest relates to how Qwest recognized revenue and accounted for sales of optical capacity and telecommunication equipment, particularly to customers who either purchased Internet services from Qwest or who received financing from the company. Qwest denies any inappropriate accounting and is complying with the request. Qwest came under fire from analysts last year over the credit it attributed to pension plan earnings, not writing down its investment in the KPNQwest NV joint venture and recording software purchases as a capital expenditure instead of an operational cost. Capital expenditures don't affect earnings, while operational costs do.
-- Microsoft Corp. has made note of an ongoing SEC accounting probe in every quarterly financial report since it first revealed the investigation during a June 30, 1999 conference call with investors. Microsoft is under investigation allegedly for setting aside some of its revenue during flush quarters in order to smooth out revenue bumps when reporting financial results in rough times.
Other companies have merely been punished by investors, who have sold off shares, simply for giving the appearance of an accounting irregularity.
-- Qualcomm Inc., drew the attention of the Center for Financial Research and Analysis in a February report citing transactions in which the cell phone technology company recorded shares of stock received for purchases as revenue.
-- IBM Corp. sold its optical transceiver unit to JDS Uniphase Inc. in December for $340 million, but accounted for the sale as part of its revenue rather than a one-time event. Though the company had recorded revenue $900 million lower than the same quarter of 2000, it beat analysts earnings estimates by a penny a share in part by using $300 million from the sale to offset operating costs. The company denied any accounting irregularity, claiming that the sale was primarily of intellectual property.
-- KPNQwest, jointly owned by Qwest and Dutch carrier Koninklijke KPN NV, said in its annual report in February that 15 percent of its revenue could be attributed to capacity swaps with other carriers and not revenue generated by businesses subscribing to network services.
-- Cable and Wireless PLC said that about 4.5 percent of its revenue between April and September of 2001 came from network capacity sales, and that most of the sales were booked with the total value of the transaction up front rather than amortized over the length of the transaction period. The companies amortized the sales in accordance with U.S. accounting law for its SEC filings and maintained the aggressive up front accounting in line with the local laws for their European filings, raising questions among investors looking for uniform transparency in the companies' finances.
-- Electronic Data Systems Corp. (EDS), one of the world's largest providers of IT services, has devoted considerable time to explaining its accounting practices lately. A story published by the Wall Street Journal in December highlighted concerns from some investors and analysts over what EDS calls client financing transactions (CFTs), in which EDS links clients with independent financial institutions willing to finance technology purchases. The problem, according to critics, is that the CFTs leave EDS open to the possibility, under certain circumstances, of having to step in and pay off the debts for their clients. EDS has arranged $2.8 billion in CFTs since it began this practice in 1995. It has had to step in and cover about $30 million, or 1 percent of that total. The company currently has about $900 million in outstanding CFTs.