Informer special report on accounting

February 2002 was a tumultuous period for many companies in the high-tech industry. In the wake of the Enron scandal, vendors' accounts were scrutinised as never before and many were found wanting. This report summarises the main events.

IT: accounting for growth
Acute ‘Enronitis'. Accusations of creative accounting were levelled at more than a dozen information technology vendors, including some of the biggest names in the industry.

None were more bizarre than those surrounding Microsoft. While many companies stood accused of artificially inflating sales and profits, it emerged that the software giant was under investigation by the Securities and Exchange Commission (SEC), the US financial regulator, for allegedly hoarding cash and making profits appear smaller than they actually were during the 1990s. There seemed at least two possible motives for such actions: Microsoft might have wanted to save cash for future accounting periods to smooth out earnings; or it may have been trying to mask the true extent of its monopoly of the software industry.

Elsewhere, allegations generally focused on policies of revenue recognition. Most cases, such as financial software specialists Sage and Misys, were deemed legal if ethically rather questionable.

At EMC, the data storage company, a former vice president met with the SEC and told them he suspected EMC had improperly booked revenue with certain resellers, including Unisys. EMC, run by Joe Tucci, denied the allegations, which came to light shortly after EMC fired two executives at its Chicago office after an internal probe found order-book irregularities.

IBM was hit by reports claiming it failed to give details of a $300 million (€343.5m) gain on the sale of a fibre-optic unit to Canada's JDS Uniphase in December 2001, even though the cash had been responsible for the company meeting profits targets. IBM called its accounting "conservative".

For Computer Associates, the systems management software giant, it was a case of déjà vu as a seemingly long-dead story about its controversial 2000 shift to pro forma accounting returned to haunt it, sending shares into freefall amid reports of a preliminary FBI fraud probe and helping to scupper a planned €1.1 billion bond for good measure.

VeriSign, the computer security and web address provider, was criticised for its affiliate relationships, which critics said amounted to financing its own customers; Baltimore was forced to re-state half-year 2001 revenues after a unit booked sales that did not get through; and Guardian IT, the disaster recovery specialist, found unspecified "discrepancies" in its accounts for 2001.

Telecoms: capacity problems
An over-inflated bubble. Fresh questions were raised about the reliability of the telecoms boom of the late-1990s amid the fallout from the biggest hi-tech bankruptcy in history. With the SEC seemingly launching new investigations each day, panic enveloped investors in the telecoms sector in the wake of the collapse of Global Crossing, erstwhile champion of the undersea cable network sector.

The testimony of one whistleblower at Global Crossing triggered the destruction of confidence. Roy Olofson, the carrier's former vice president of finance, went public with allegations that Global Crossing swapped identical network capacity with rivals and booked the transactions as revenue, even though often no money actually changed hands. Soon, it became clear that such ‘swaps' were widespread across the sector.

Other carriers admitting to such practices included Cable & Wireless, Qwest, Level3, KPNQwest and Optus.

Meanwhile, Qualcomm, the wireless technology company, had to defend its accounting methods after a research firm questioned the way it recorded its sales.

Claims of faulty accounting also hit telecoms equipment vendors Ericsson and Alcatel.

Ericsson, led by Kurt Hellstrom, was accused of dressing up its group balance sheet by artificially recording loans in the accounts of its subsidiaries, while a former Alcatel chairman claimed the French vendor had hidden losses of €915 million following his departure in 1995.

Elsewhere, the jittery sector was further rocked by the news that alternative telecoms operator Carrier1 was filing for insolvency.

Network giant Worldcom, meanwhile, suspended three executives and froze the commissions of at least 12 sales people amid an ongoing internal investigation into an order-booking scandal at three US offices.

And Nortel Networks said its chief financial officer, Terry Hungle, had resigned after buying and selling company shares within his retirement plan in ways that violated company policy.

Comment: See analysis of general accounting standards in the tech industry.

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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