IBM’s Accounting Scrutiny Dates Back

IBM’s disclosure of a formal investigation by the U.S. Securities and Exchange
Commission (SEC) isn’t expected to shake up confidence in the Armonk,
NY-based computer giant’s management team, but does serve to highlight the
increased scrutiny that corporate executives are facing in the
post-Enron/post-WorldCom era, experts said.

Late Monday, IBM disclosed it had received an SEC subpeona for a formal,
non-public investigation into its revenue recognition in 2000 and 2001,
stemming from a customer of its Retail Store Solutions unit, which sells
point-of-sale products.

“We are optimistic that the investigation will remain an isolated
incident,” according to George Elling, hardware analyst at Deutsche Bank.

Even Elling, though, acknowledged in his research note that the
disclosure would adversely affect investors’ psychology. And sure enough,
IBM’s stock dropped precipitously in early Tuesday trading.

Exacerbating the situation for IBM is the fact that Monday’s
disclosure — which Big Blue characterized as a “fact-finding” mission that
has not led to any conclusions — isn’t the only isolated incident for the
current management team.

In its quarterly review of last year’s
first quarter results
(the first conference call held following the
departure of long-time CEO Louis V. Gerstner Jr.), Chief Financial Officer
John Joyce kicked off the
conference call
with an unusual reprimand:

“I’d also like to take a moment to comment on the various reports we’ve
seen recently involving our accounting and disclosure practices. We have
been astounded over the kinds of things we’ve read about IBM in the last few
months. We certainly have no interest in rehashing any of it,” Joyce
exclaimed on April 17, 2002.

IBM officials now confirm that Joyce’s comments at the time referred to
questions involving IBM’s accounting of the sale of its optical transceiver
business to JDS Uniphase , which took place during the
previous fourth quarter of 2001. JDS Uniphase
agreed to buy the fiber optic transceiver unit for $340 million in cash
and stock. By February 2002, a New York Times article appeared
questioning management’s practice of booking the amount, rather than a
one-time gain, as an offset to expenses in the wake of slumping fundamental
business conditions. Sure enough, just weeks before that 2002 first quarter
conference call, IBM made its bombshell
that for the first time in 10 years its earnings would fall
short of expectations.

That case resulted in a separate SEC investigation that has now been
concluded. “The SEC did resolve that without any charges against IBM
whatsoever,” IBM spokesperson Joe Stunkard told

“So let me just say once and again we’re proud of our accounting and
disclosure practices. We hope this issue is behind us. And we’d like to move
on,” Joyce said on that 2002 first quarter conference call.

Those sentiments were echoed in IBM’s release issued Monday.

“IBM believes that its business and accounting policies comply with all
applicable regulations and is committed to maintaining the highest standards
of compliance relating to its financial reporting,” the company said. It
added it has been cooperating fully with the SEC and will continue to do so.

In a separate investigation, the SEC also questioned IBM’s practice of recording income from gains on its overfunded pension. According to the Wall Street Journal, the SEC send letters asking IBM to amend its financial statements for 1999 to provide greater detail of the pension income. IBM, subsequently, agreed to make the changes in its annual report for 2001.

The SEC also investigated IBM over the course of the 1990s for an alleged
bribery scheme to win government contracts in Argentina; however, IBM
settled that case before formal charges were ever brought.

“SEC investigations, while not commonplace, certainly are part of the
corporate landscape and often result in no formal charges. Although it is
premature to attempt to address the issue, we firmly believe in the
credibility of IBM’s management team and its years of corporate integrity,”
Elling said.

However, the DB analyst warned that the scope of the investigation could
expand into other areas if the SEC deems it necessary.

— Erin Joyce contributed to this article.

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