Microsoft agrees to stop accounting violations

Microsoft today agreed to stop accounting practices that violated federal securities laws in an agreement reached with the Securities and Exchange Commission.

The company didn't admit or deny the SEC's findings, nor was it fined or required to restate its earnings.

The SEC announced it had ordered Microsoft to cease and desist from "committing accounting violations and other violations of federal securities law."

Microsoft had seven reserve accounts with balances ranging from about US$200 million to $900 million that the company was required to reconcile each quarter, the SEC said. The discrepancies resulted in overstatements and understatements of income during various quarters between 1995 and 1998.

By failing to report accurately on each of these accounts, the SEC said Microsoft didn't comply with generally accepted accounting principles with seven reserve accounts the company maintained.

"Basically, they reported their income incorrectly for a number of years," said Thomas C. Newkirk, associate director of the SEC's enforcement division. "Sometimes it was too high and sometimes it was too low."

In a statement, Microsoft was quick to point out that the SEC didn't fine the software maker, nor did it require the company to restate its earnings. Microsoft also noted that the SEC findings resulted in no changes to its financial results.

However, Newkirk said fines are rare in these cases and the accounting problems fell outside the SEC's three-year limit. Violations more than three years old don't trigger a restatement of income.

"Ordinarily, we don't impose fines on public companies for financial reporting violations because it just comes from the shareholders who were the victims in the first place," Newkirk said.

"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 company statement said.

Microsoft spokeswoman Caroline Boren said the company would have no further comment on the SEC action beyond the statement.

The action against Microsoft shows that the commission will go after "a public company that issues financial statements with material inaccuracies, even in the absence of fraud charges," said Stephen M Cutler, director of the SEC's enforcement division, in the SEC statement.

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