After Enron, Tech Sector Accounting Under Scrutiny
Sat
Feb 9, 7:59 AM ET
By
Daniel Sorid
NEW YORK (Reuters) - While
the Enron debacle puts the spotlight on accounting practices at other companies,
a technology industry notorious for tweaked profit reports still has a few
tricks up its sleeve.
|
Pricey payments for stock
options that show up nowhere on income statements. Massive asset write-downs
that help inflate future earnings. Specially designed profit reports that mask
the ugly details.
These methods and more are
hallmarks of a sector facing new demands for a return to the hefty revenue and
profit gains that tech companies bragged about before the bust.
"I don't think there
is an Enron type of story, but there are certainly a variety of very commonly
used techniques in technology companies that exaggerate a company's profits,"
said Howard Schilit, director of a Maryland-based accounting watchdog, the
Center for Financial Research & Analysis.
In some cases,
investigations have already begun.
On Friday,
telecommunications company Global Crossing Ltd. found itself the focus of two
separate federal investigations after allegations of improper accounting. The
company has denied improper accounting.
MANY WAYS TO BEND THE
NUMBERS
Among the chief complaints
are rules that allow companies to keep the cost of stock options -- a popular
compensation tool in the technology world -- off income statements.
A study by Bear Stearns
estimated that earnings per share reported by the companies listed in the
Standard & Poors 500 index would have been 6 percent lower in 1999 if the
fair value of options were included.
When managers and
executives are given loads of options, they have an interest in maintaining
stock valuation growth even at the expense of the long-term health of the
company, said David Rocker, who runs New York-based hedge fund Rocker Partners.
"The incentives of
the managers are a function of the enormous options positions they have,"
Rocker said.
LEGAL MOVES, BUT INVESTORS
JITTERY
Even perfectly legal
accounting maneuvers by technology companies have spooked investors, who hope to
steer clear of future disasters.
Ariane Mahler, an analyst
with Dresdner Kleinwort Wasserstein, said the most recent revenue report by
Cisco Systems Inc. was inflated by deferred revenue -- orders that were booked
in prior quarters but not shipped.
She also said Cisco's
gross profit margins were inflated because the company had sold some of the
$2.25 billion worth of inventory that it wrote off last spring. An $858 million
investment write-down the company took could boost future results, Mahler said.
Cisco and several Wall
Street analysts have dismissed the allegations, saying the company's accounting
is complies with generally accepted principles. Cisco shares have fallen sharply
over two days.
Schilit, director of the
accounting research group, said the use of deferred revenue has tainted the
income statements of some software companies. Sometimes a portion of software
sales, such as maintenance or upgrades, can be stored as deferred revenue, and
pulled from that pool of money to boost quarterly revenue statements in bust
times, Schilit said.
By looking out for details
about deferred revenue, investors can judge the quality of reported revenue for
themselves.
"People begin to
understand that the company's sales are really starting to struggle, so people
will begin to catch on that quality of earnings and the quality of revenue is
suspect," Schilit said.
ENRON MAKES TECH INVESTORS
NERVOUS
Computer security and Web
address provider VeriSign Inc. has been criticized for its affiliate
relationships, which critics say amount to financing its own customers. Shares
of VeriSign recovered strongly on Friday, after Bear Stearns analyst Chris Kwak
wrote in a research note that the affiliate relationships were not a cause of
concern.
A Verisign spokesman said
the company has regularly discussed details of its affiliate programs.
Motorola Inc. , Nokia (news
- web
sites) , and other
telecommunications companies have also boosted sales by loaning money to
customers in an approach called vendor financing.
The process has not always
worked out for the best. Motorola and Nokia, the world's two largest mobile
telephone makers, have filed a $3 billion lawsuit against one such recipient, a
Turkish wireless carrier, alleging fraud. The company, Telsim, has denied the
charges.
Software company Computer
Associates faced strong skepticism last year for its accounting. The company, as
well as some Wall Street analysts, have stood by the methods.
Many of the major
technology companies are believed to have tweaked their numbers in order to meet
Wall Street expectations, or at least look better, industry experts said.
International Business
Machines includes income from its pension fund in its earnings reports, for
instance.
And Cisco, which maintains
it is conservative in its accounting, had earned a reputation by beating Wall
Street estimates by a penny per share consistently, quarter after quarter, until
last year.
But with
the Enron Corp. collapse putting accounting in all sectors under the microscope,
technology companies can be sure investors will be watching them closely.