3 October 2002 EDS, the world’s second largest IT services vendor, has become the latest company to be investigated over its accounting practices.
In an open statement to shareholders, CEO Dick Brown wrote that the company has received a request from the US Securities and Exchange Commission (SEC) to release documents related to a share issue and its recent third-quarter profits warning.
In mid-September 2002, EDS announced that its third-quarter revenues would be down 5% to between $5.3 billion (€5.36bn) and $5.5 billion (€5.56bn), rather than the 6% year-on-year increase in revenues it had previously forecast. EDS blamed weakening demand for its services and the fact a major customer, US Airways, had filed for Chapter 11 bankruptcy protection. The SEC will investigate the events that caused this discrepancy.
In addition, the SEC will look into EDS’s strategy for issuing shares under its employee stock option plan. EDS used derivatives – securities whose values are derived from underlying assets – to try and reduce the cost of issuing these shares. However, the company was forced to pay $225 million (€227.6m) in cash to buy back options from investors as a result.
In his statement, Brown insisted that “EDS will cooperate fully with the SEC in this matter and is confident that the inquiry will confirm its actions were proper.”
Brown’s address to shareholders came only days after another open letter to investors, addressing their concerns about its recent profit warning, promising to reduce EDS’s costs in order to better align earnings and cash flow. EDS’s shares have lost four-fifths of their value this year.