High-Tech Not Immune To Increased Accounting Scrutiny

Enron's bankruptcy, the biggest in U.S. history, and the alleged role of its auditing/consulting partner, Arthur Andersen, will push the Securities and Exchange Commission and other financial regulators to step up oversight of corporate accounting in all industries,high-tech included, business and legal experts say.

Regulators' central focus will be on the reporting of revenue, earnings/losses and debt, since many companies today are hard-pressed by investors to maintain high growth rates and rising stock prices, according to experts. "Everyone is worried these days about aggressive reporting of revenues and cost deferrals," said James Cox, an accounting expert and professor at Duke University School of Law.

The accounting concerns arising in the wake of the Enron debacle have Wall Street, investors, corporate executives and employees jittery, said Debra Jeter, associate professor of accounting at Vanderbilt University's Owen School of Management. "The market is very uncertain and even frightened as to what to think about corporate earnings reports," she said. "On the one hand, this is probably an overreaction to the Enron situation. On the other, it's a good thing for investors to be aware that accounting manipulations are quite possible,even in audited firms,and perhaps quite likely."

Already, a series of accounting issues have surfaced at some high-tech companies in the wake of the Enron debacle. Here's a look at what happened and how each company is handling the issue:

GLOBAL CROSSING
Accounting Issue: Former vice president of finance Roy Olofson charges in an August 2001 letter to the company that Global Crossing improperly reported revenue. The SEC launches an inquiry, and the company provides a copy of the letter.

Company Response: Global Crossing questions Olofson's "motivations" and says it "continues to believe that its accounting and reporting are entirely appropriate." At the request of its audit committee and Arthur Andersen, Global Crossing forms a special committee to conduct a further review.

ENTERASYS NETWORKS
Accounting Issue: Enterasys discloses a discovery of accounting discrepancies relating to a $4 million contract in the Asia-Pacific region.

Company Response: Enterasys launches an investigation of contracts and revenue recognition throughout the region, puts three employees on administrative leave and delays the release of fourth-quarter and full-year financial results.

RSA SECURITY
Accounting Issue: The SEC launches probe of whether a change in RSA's method for estimating distributor revenue for first-quarter 2001 should have been disclosed earlier.

Company Response: RSA denies any improprieties and says the inquiry won't require changes to its financial statements. "The SEC has not concluded that there has been any wrongdoing, and we don't believe that there has been any," says RSA CEO Art Coviello.

CRITICAL PATH
Accounting Issue: Former president pleads guilty to securities fraud and says he helped book nonexistent revenue on the company's income statements.

Company Response: Critical Path issues statement noting that the SEC acknowledges present management's cooperation in the investigation and will assess no monetary penalties or fines against the company.

EMC
Accounting Issue: Two employees fired after company investigates alleged irregularities in the booking of customer orders.

Company Response: EMC finds that less than $1 million in orders was involved and that the case had no impact on the customer and will have no material effect on the company.

EDS
Accounting Issue: Focus on customer financing transactions (CFTs), a longtime practice of funding client purchases of hardware through banks. EDS doesn't carry the potential liability on its books.

Company Response: EDS CEO Dick Brown says the company has always disclosed CFTs and has no hidden debt or liability. Of the $2.8 billion in third-party computer financing facilitated since 1995, EDS has acquired only $30 million of assets.

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