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Network Associates Details Accounting Errors

Santa Clara, Calif.-based security software firm Network Associates said accounting errors including the reclassification of amounts from its tax liability accounts to the general and administrative liability accounts caused an understatement of expenses in financial results for 1998 through 2000.

The company, which is facing an investigation by the SEC into accounting practices, said the errors would force the restatement of financial results for those years. The restated financials will be filed with Securities and Exchange Commission by the end of June.

Network Associates first shed light on the errors when it announced the cancellation of it planned takeover of subsidiary McAfee.com said it also found problems with the way payments to a distributor were recorded in its balance sheet.

The software vendor said the earnings restatement would slice net income in 1998 by 3 cents a share and would narrow the net loss in 1999 by 2 cents a share. In 2000, the restatement would widen its net loss by 16 cents per share, the company said.

"In 1998, inaccurate accounting entries were identified that reclassified amounts from the tax liability accounts to the general and administrative liability accounts," Network Associates explained. "The cumulative impact of these entries was to understate operating costs and expenses for 1998 by$6.2 million."

In a detailed statement on the audit probe findings, the company said income from operations and income before provision for income taxes were overstated by $6.2 million and the provision for income taxes was overstated by $2.2 million.

"The correction of the foregoing inaccuracies reduces previously announced net income by $4.0 million from $36.4 million to $32.4 million, and reduces previously announced 1998 basic and diluted Net income by (3 cents) per share."

During 1999, Network Associates said inaccurate accounting entries were identified that reclassified amounts from the tax liability accounts to the general and administrative liability accounts and reclassified amounts from the tax liability accounts to the sales return reserve account.

It also reclassified amounts from a general and administrative liability account to a marketing liability account, causing an overall overstatement of net revenues for 1999 by $28.2 million and an understatement of operating costs and expenses by $1.5 million.

The audit also uncovered inaccurate accounting entries during 2000 when payments to a distributor were recorded in a balance sheet tax liability account instead of reducing net revenue.