UPDATE: SEC settles with Microsoft over accounting issues

ITworld.com –

The U.S. Securities and Exchange Commission (SEC) announced Monday that it reached a settlement with Microsoft Corp. over accounting violations in which the company misstated its income, and ordered the software maker to cease and desist such practices.

The settlement marks the end to years of investigation by the SEC over allegations that Microsoft was employing "cookie jar" accounting practices in which it put aside income in certain quarters to pad future financial results when the company did not meet expectations. These practices are seen as misleading to investors.

The SEC said that Microsoft maintained seven reserve accounts that did not comply with generally accepted accounting principles (GAAP), because they did not have "adequately substantial bases." The Commission also found that the software maker did not properly document the bases for the accounts, and failed to maintain proper internal controls, as required by federal securities law.

"This case emphasizes that the Commission will act against a public company that issues financial statements with material inaccuracies, even in the absence of fraud charges," Stephen M. Cutler, director of the SEC's Division of Enforcement said in a statement.

The case also marks a recent government clampdown on dodgy corporate financial reporting, as exemplified by the high-profile collapse of energy trading firm Enron Corp.

Still, under the settlement agreement Microsoft is admitting no explicit wrongdoing and is not obliged to pay a fine.

In a statement issued Monday, Microsoft said that it has consented with the SEC order that it comply with Securities Exchange Act provisions requiring it to make accurate financial filings and maintain records and controls required under GAAP.

"The company is pleased to have resolved these matters with the SEC and looks forward to an open and constructive working relationship with the SEC on important accounting issues affecting the software industry," the statement said.

Microsoft added that the settlement does not require the company to restate any of its financial results. The SEC probe focused on the software maker's financial reporting from June 30, 1995 to June 30, 1998.

During that time period, Microsoft maintained between US$200 million and $900 million in unsupported and undisclosed reserves, a majority of which did not comply with GAAP, the SEC reported.

While the Commission's probe uncovered a handful of inaccuracies and violations in the software maker's accounting practices, Microsoft said that its reported financial results would not be affected.

However, stock in the company (MSFT) had slumped 1.39 percent to $50.20 in early afternoon trading following news of the settlement Monday.

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