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IBM's financials questioned
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November 24, 1999: 6:00 p.m. ET
Stock price suffers on scrutiny of accounting practices
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - Shares of IBM took a dive Wednesday after a published report scrutinized the company's accounting practices.
At issue in the report, which appeared in Wednesday's Wall Street Journal, is the way Big Blue reports one-time gains in its quarterly earnings statements.
The article says that since IBM includes such gains on the selling, general and administrative (SG&A) expenses line of its income statement, its reported operating income is higher and its reported expenses are lower than they would be if those items were included as non-operating expenses.
It quotes forensic accounting expert Howard Schilit of the Center for Financial Research and Analysis in Rockville, Md. as calling this "an unusual treatment of one-time gains."
IBM (IBM) shares lost more than 4 in morning trade on volume just below IBM's average, but recovered slightly in the afternoon, closing down 1-31/32 at 104-1/16.
IBM on Wednesday defended the company's reporting practice, saying it has been consistent for the past six years and that the company has made it very clear to analysts.
"We think we're doing this the right way, handling it in an appropriate manner," said IBM spokesman Rob Wilson. "We've fully and openly disclosed the impact of each of our write-downs. We break that out in our earnings statements and filings. We've had many write-downs in the last six years, and we've handled them the same way."
While acknowledging that the complexities of IBM's accounting and financial-reporting practices could make it difficult for some investors to make quarter-to-quarter financial comparisons, some analysts who track the company agreed.
"I have never found a problem with the financial officers' explanation of the financials at the end of each quarter," said Sam Albert of Sam Albert Associates, an independent management consultant firm in Scarsdale, NY.
Albert, a 30-year Big Blue veteran, said that while IBM's reporting method may make it difficult for the casual observer to get a quick snapshot of the company's financial status, it is unlikely that it has been trying to deceive investors.
"As long as you handle things uniformly, I don't think you're skewing it either in favor of or against IBM in terms of the stock holders," he said. "From an IBM watching standpoint I don't see that something was trying to be put over my eyes."
The Journal article points to IBM's recent sale of its Global Network business to AT&T, for which it booked a one-time gain of $4 billion, as an example of how the company could be using the reporting method to make itself look more efficient.
But in a research note he sent to client Wednesday morning, analyst Robert Wilkes of Brown Brothers Harriman & Co. pointed out that IBM was forthright in disclosing the impact of that sale.
"While the gain was included in operating results, it was clearly stated up front in the earnings press release, and management encouraged analysts to remove it from their earnings models," Wilkes said.
Wilkes also noted that the gains had been excluded from First Call's analysts' consensus earnings estimates.
As for IBM's reported reduction in operating expenses - more than $1 billion during the first nine months of this year, according to the Journal - Albert said that the company's recent shift in focus could easily have yielded such results.
Under chairman and chief executive Louis Gerster, the company has been shifting its focus away from being a manufacturer of equipment and assuming a new role as a supplier of business technology and services, Albert said.
"There's a great deal of attention by the senior management at IBM on expense reduction, and in fact, they may even be paying managers more on that measurement than they are on accelerating revenue increases," he said. "The question is if IBM is not only focused on expense reduction in the traditional sense, but focused on it in an accounting sense that's improper. I don't see anything improper with what's been done."
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