osI am always amazed by the actions of people who operate by their own set of rules. For example, some years ago, there were some sports teams that supposedly lost games on purpose in order to finish last and thereby draft position No. 1 for the pool of players coming out of college. Then there is the individual who cuts to the front of the line at a bus stop. There also is a major company that I always felt made their own set of rules, and seem to continue to get away with it. This latest example is no different.

In a barely discernable light slap on the wrist, the SEC settled an administrative enforcement action against Microsoft for repeatedly misstating its income by material amounts in filings made between July 1, 1994, and June 30, 1998. Specifically, during the relevant period, the SEC found Microsoft maintained approximately $200 million to $900 million in unsupported and undisclosed reserves, a significant portion of which did not comply with GAAP, which resulted in material inaccuracies in those filings made by Microsoft with the Commission. There was also a finding of failure to maintain internal controls.

In agreeing to the cease and desist order from committing accounting violations and others of federal securities laws, Microsoft consented to the issuance of the Commission's Order without admitting or denying the findings. No fine was imposed and Microsoft didn't even have to restate its earnings.

The cease-and-desist order at www.sec.gov/litigation/admin/34-46017.htm is fascinating reading as it details the internal decision making of Microsoft. It appears that Microsoft was using the reserve accounts to adjust income up or down and thereby manipulating the income to appear as it wanted without concern about the fact that they weren't the real numbers for accounting purposes.

This order is supposedly the result of a three-year SEC investigation. No fraud was found. Thomas Newkirk, an associate director of enforcement at the SEC and who was directly involved in the investigation, is quoted as saying, "Here, the evidence we put together was that this was the result of failure to do their homework rather than to cheat investors."

I find it amazing that it took the SEC three years to find out that Microsoft simply goofed and only saddled it with a cease-and-desist order. No, Mr. Newkirk, I don't believe these material misstatements were the result of a "failure to do their homework," but more likely the result of a belief that they were exempt from the homework requirement.

 

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