SEC Probes Microsoft's Revenue Reporting

From Reuters

Federal authorities are investigating Microsoft Corp.'s practice of setting aside some of its software revenue and recognizing them later, Chief Financial Officer Greg Maffei said Wednesday.

Maffei said in a conference call with reporters and analysts that the Securities and Exchange Commission apparently launched the probe after a newspaper report drew attention to a dispute over whether the company dips into its "cookie jar" of reserves to smooth financial results.

"We don't know the entire scope other than it relates to reserves and reserve policies," Maffei said, adding that the company is "cooperating fully" with the SEC.

The brief Wall Street Journal article, published in January, referred to a lawsuit brought by a former company auditor who charged that he was wrongfully terminated after raising questions about so-called cookie jar accounting.

Microsoft has consistently said it follows industry guidelines in deferring recognition of revenue from products such as Windows and Office to account for later delivery of upgrades and support.

Microsoft began the practice with the launch of Windows 95, saying such software was becoming more like magazine subscriptions that are paid for upfront and delivered over months or years. Since then, such "unearned revenue" on the company's balance sheet has grown to more than $4 billion.

The SEC declined even to confirm the investigation, although Chairman Arthur Levitt has waged a campaign against improper use of reserves to pad corporate results in later quarters.

Analysts said they were not concerned by the SEC probe.

"I think it's much ado about nothing because you can still see the revenue and track it," said analyst Chris Galvin of Hambrecht and Quist. "It's not like they're holding back."

Bill Epifanio, an analyst with J.P. Morgan, said, "Given the size of their revenues, it's turned into quite a valuable asset for them in terms of helping them smooth out their results."

He and others said Microsoft stock could go higher Thursday on separate remarks by Maffei indicating that business in the quarter just ending was at least as strong as expected.

The remarks came as Maffei disclosed that Microsoft was adjusting its reserve policies to comply with new accounting guidelines and recognize more Windows and Office revenue up front.

Maffei said the change was unrelated to the SEC probe and had been discussed with the agency.

The change will add about 1 cent a share to Microsoft earnings in the fiscal fourth quarter that ended Wednesday and another 1 cent a share in fiscal 2000, he said.

Maffei also said the company had reclassified revenue and expenses from four relatively small businesses, including product support and Internet access.

The change had the effect of adding about $2 billion in revenue over the last 11 quarters, boosting the total by about 5%, although because of related expenses, the company's reported net earnings were not affected.

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