Microsoft Agrees to Refrain From Accounting Violations in SEC Settlement

Under a settlement with the Securities and Exchange Commission, the software giant neither admitted to nor denied wrongdoing. No fine was imposed.

The SEC alleged that Microsoft's accounting practices from July 1994 through June 1998 caused its income to be substantially misstated.

The settlement comes as the SEC is investigating and acting against alleged accounting abuses at a number of big companies in the aftermath of Enron's collapse.

In April, Xerox agreed to pay a record $10 million civil penalty and revise its financial statements back to 1997 to settle the SEC's allegations of accounting fraud. The SEC says the office-equipment maker used "accounting tricks" and "accounting opportunities" to boost its earnings by some $1.5 billion and hide its true performance from investors.

id
unit-1659132512259
type
Sponsored post

The SEC did not allege fraud in the Microsoft case. It took the action in an administrative proceeding, a milder course than the civil lawsuits which the agency has the power to bring.

Still, SEC enforcement director Stephen Cutler says the case shows that the agency "will act against a public company that issues financial statements with material inaccuracies, even in the absence of fraud charges."

Microsoft, in a statement from its headquarters in Redmond, Wash., said the settlement has no effect on its financial results.

"Microsoft has cooperated fully in the SEC's inquiry," it said. "The company is pleased to have resolved these matters with the SEC and looks forward to an open and constructive working relationship with the SEC on important accounting issues affecting the software industry. "

The SEC alleged that Microsoft did not properly document the bases for its accounting and failed to maintain proper internal controls.

The agency says Microsoft enhanced its financial results by setting aside artificially large reserves to reduce revenues, with the idea of reversing that procedure to record the revenues in less profitable times.

The SEC has criticized the use of such so-called "cookie-jar" reserves, which it says can give investors an inaccurate picture of the company's current financial performance.

Microsoft disclosed the SEC's investigation in its annual report for 1999.

More than a year ago, Microsoft reportedly received a so-called Wells notice from the SEC, a warning that the company could face civil charges. Chairman Bill Gates and other top Microsoft executives were deposed, and settlement negotiations began late last year.

Accounting rules generally allow businesses to set aside funds for potential expenses such as returned products, excessive inventory and bad debts. A higher estimate of those expenses reduces the amount of reported earnings.

The SEC investigation apparently stemmed from a lawsuit filed in 1997 by Charles Pancerzewski, a former Microsoft internal auditor who said he was wrongly fired for warning that the company's accounting reserve practices could violate SEC rules. The case was settled and the record sealed after a federal judge cleared the way for the case to go to trial.

Copyright © 2002 The Associated Press. All rights reserved. The information contained in the AP News report may not be published, broadcast, rewritten or redistributed without the prior written authority of The Associated Press.