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SEC investigating MSFT
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June 30, 1999: 7:08 p.m. ET
Newspaper report sparks inquiry into reserves and accounting practices
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NEW YORK (CNNfn) - Microsoft Corp. said Wednesday the U.S. Securities and Exchange Commission has been investigating the company's policy of deferring revenue for such items as undelivered product upgrades.
In a conference call with analysts and reporters, Microsoft (MSFT) Chief Financial Officer Greg Maffei said the agency began investigating the company as the result of a Wall Street Journal article published in January.
Maffei declined to give specific details, noting the investigation is not public. He did say that the company is cooperating fully with the SEC and that Microsoft does not believe the investigation will have an effect on its financial condition.
An SEC official declined comment.
Cooking the books?
The Wall Street Journal article, dated Jan. 14, 1999, concerned a wrongful-discharge lawsuit filed by Charles Pancerzewski, a former Microsoft internal auditor. Pancerzewski charged the company with manipulating hundreds of millions of dollars in revenue reserves to make its profits appear more stable.
The company would, according to Pancerzewski, set aside revenue in its more profitable quarters and add them in leaner periods, the Journal said.
Microsoft began accounting for unreported revenue in 1995 as vendors were ordering thousands of copies of Windows 95 well before the company was able to ship the software. Rather than booking the revenue as the orders came in, Microsoft elected to reserve the revenue when the software actually shipped.
Recently, the company's third-quarter results excluded $400 million in unreported revenue from early sales of the Microsoft Office 2000 suite of business software.
Microsoft said most of the revenue gained from that product would be accounted for in the fourth quarter when the products were actually shipped.
Earlier in the conference call, Maffei said Microsoft has reclassified the manner in which it represents revenue from its smaller business segments, including product support, consulting services and Microsoft Network access.
As a result of the reclassification, revenues from fiscal 1997 through 1999 have been adjusted. The change pushes Microsoft's fiscal 1997 revenue 5.1 percent higher to $11.9 billion from $11.4 billion; fiscal 1998 revenues now stand 5.4 percent higher at $15.2 billion from $14.5 billion; and year-to-date fiscal 1999 revenues are 5.8 percent higher at $14 billion from $13.2 billion.
Maffei said the reclassification of revenue is unrelated to the SEC investigation.
Microsoft will also change the way it accounts for unreported revenue in its Windows and Office products due to a new federal accounting guideline.
Maffei added that with changes in revenue reporting, he expects analysts to raise their fourth-quarter earnings expectations by a penny a share.
Microsoft is scheduled to report its fourth-quarter and fiscal 1999 earnings results July 19. Analysts polled by First Call expect the company to post a profit of 35 cents a share in the quarter.
Microsoft shares rose 2-3/16 to close at 90-3/16 in Nasdaq composite trading.
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