13 February 2002 The hi-tech sector has been further hit by new allegations of fraud, insider dealing and creative accounting aimed at some of the industry’s biggest and best known companies.
The fresh accusations have been levelled at software giant Microsoft, data-storage giant EMC, security-software specialist Baltimore Technologies, telecoms equipment vendor Nortel, cable operator KPNQwest and telecoms operators Cable &Wireless (C&W) and Qwest Communications.
Their names have been added to a growing number of technology companies under suspicion, including bankrupt telecoms operator Global Crossing, Computer Associates, Cisco Systems, IBM, the financial software companies Sage and Misys and disaster recovery specialist Guardian IT.
But it seems unlikely that this will be the final list as regulators cast their net wider in the wake of the scandal surrounding accounting standards at Enron, the bankrupt energy-trading giant.
Of the latest allegations of accounting trickery, arguably the most bizarre concerns Microsoft.
While many companies have been accused of artificially inflating sales and profits, the Redmond, Washington-based company is under investigation by the Securities and Exchange Commission (SEC), the US financial markets regulator, for allegedly hoarding cash and making profits appear smaller than they actually were during the 1990s.
“We take our financial reporting very seriously and we are co-operating fully with the SEC,” said a Microsoft spokesman.
Observers say there are at least two possible motives for such unusual actions: Microsoft might have wanted to save cash for future accounting periods in order to smooth out earnings; or it may have been trying to mask the true extent of its monopoly of the software industry.
The software giant is not only the most profitable software company in the world, but its profits easily exceed those of the next 49 largest software companies put together.
Elsewhere, shares in EMC fell sharply after a former company vice-president, Kenneth Todd Gresham, disclosed that he had met recently with the SEC and told them he suspected EMC had improperly booked revenue with certain resellers, including Unisys. EMC denies any misconduct and says that the allegations are without merit.
The new allegations came to light just two days after it emerged that EMC had fired two executives at its Chicago office after an internal probe found irregularities in the booking of customer orders.
Baltimore has also been forced to re-state revenues at its Japanese unit because it had booked sales that did not got through. It said sales were overstated by £1.5 million (€2.5m) in the six months to the end of June 2001.
Meanwhile, as the SEC and Federal Bureau of Investigation (FBI) continued their probe into accounting practices at collapsed Global Crossing, attention turned to other major carriers amid growing concern that bogus revenue-boosting deals, called ’round-tripping’, were widespread across the industry.
Yesterday, C&W admitted that it had used similar accounting techniques by swapping spare capacity with other carriers. The practice involves two telecoms companies selling capacity on their networks to each other for the same price, but booking the transaction as revenue.
Although C&W admitted that some of the deals did not involve cash changing hands, it denied that they had been so-called ‘hollow swaps’, which are illegal. But the company did concede that it had generally booked these revenues immediately, even though the leases lasted up to 20 years.
Other carriers have made similarly startling admissions. KPNQwest, the Dutch cable operator, said that 15% of its revenues came from swapping capacity with other operators. Qwest has also undertaken such deals.
Meanwhile, it also emerged that Nortel chief financial officer Terry Hungle had resigned after buying and selling company shares during a period leading up to the company issuing a profits warning in March 2001.
In a further development yesterday, SEC chairman Harvey Pitt said that the regulator plans to introduce more than a dozen new rules about how and when companies should file their financial reports.
Whistleblower: Global Crossing ‘skewed results’ (6 February 2002)