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SEC Opens Investigation Into IBM Financials

Probe focuses on revenue recognition for 2000 and 2001. Big Blue says there has been no conclusion about whether accounting rules were violated.

June 03, 2003|Joseph Menn | Times Staff Writer

The Securities and Exchange Commission has opened a formal investigation to determine whether IBM Corp. improperly recorded revenue in 2000 and 2001, the world's biggest computer company disclosed Monday.

IBM said it believed the inquiry grew from a probe of a customer of IBM's retail store solutions unit, which is part of the personal systems group that sells personal computers and other machines. The unit sells cash registers and other gear used by retailers to process sales.

The SEC has subpoenaed IBM records as part of the new inquiry and hasn't reached any conclusions about whether the company violated accounting rules, IBM officials said.

An SEC spokesman declined to comment.

IBM fell 71 cents to $87.33 in regular trading on the New York Stock Exchange, and to as low as $84.95 in after-hours transactions after the disclosure.

"Revenue recognition is a major hot button for the SEC right now, as well as investors," said Horace Nash, head of the securities practice at Silicon Valley law firm Fenwick & West. "The SEC is conducting many, many investigations."

Shareholders often sell on news of such probes for fear they will lead to restatements of financial results, Nash said.

IBM said in a statement that it is cooperating with investigators and that its "business and accounting policies comply with all applicable regulations."

The retail store unit has done business with the likes of Wal-Mart Stores Inc. and Home Depot Inc. An IBM spokesman declined to identify the customer at issue.

Revenue recognition is a complex and evolving area that requires executives to make judgment calls on the collectibility of accounts and other financial matters. What was seen as acceptable three years ago may no longer pass muster, Nash said.

The probe is not IBM's first brush with financial regulators. In 2000, the Armonk, N.Y.-based company agreed to pay $300,000 to settle SEC claims that it improperly failed to disclose secret payments by an Argentine subsidiary to win a $250-million bank contract.

And Big Blue has faced repeated questions from the SEC over how it records gains from the sale of its business units. Last year, the agency opened a preliminary investigation into one such episode, in which IBM used a $300-million gain to offset general expenses. Analysts criticized that step as making the company seem more efficient than it really was. The SEC closed the case without taking any public action.

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Times staff writer Jonathan Peterson contributed to this report.

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