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SEC is Probing IBM Earnings

The Securities and Exchange Commission's investigation into IBM's first-quarter 2005 accounting practices is now official, IBM confirmed.

The systems vendor said that it has received notice of a formal, nonpublic investigation by the SEC concerning IBM's disclosures relating to the Q1 earnings and expensing of stock options compensation.

IBM said it will continue to cooperate with the SEC, which first made an informal inquiry in June. Big Blue also noted that the SEC has assured IBM that the probe is not an indication that the company has broken any laws regarding fiscal reporting.

An IBM spokesman refused to provide more specifics about what the SEC is looking for in its investigation.

With the informal inquiry, the SEC can ask IBM to provide any information related to financials. But by making the probe formal, the SEC may subpoena documents from IBM.

The SEC's interest was sparked after IBM CFO Mark Loughridge said on an April 5 conference call the company would begin accounting for the expense of stock options and other stock-based compensation before the deadline to do so under new SEC staff accounting requirements.

"We have implemented targeted actions to address equity compensation," Loughridge said. "For example, we have reduced the number of equity grants, and implemented premium-priced options for our executive population.

"This year we are facing significant increases in cost and expense driven by accounting for pensions."

Loughridge then asked analysts to lower their earnings-per-share estimates to 90 cents from $1.04, a drop of 14 cents.

However, when IBM put out its first-quarter financials April 14, it reported earnings of 84 cents a share, and the new options cost contributed only 10 cents of expense.

IBM reported a profit during its first quarter of 2005 but missed its earnings guidance by five points, blaming difficulty closing key deals and slow growth in overseas markets.

Analysts later complained that IBM had played up the impact of the options expensing in order to lower estimates ahead of a disappointing quarter.

The SEC informed IBM of its informal inquiry two months later.