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SEC Settles Microsoft Accounting Investigation
guttentag writes "The Securities and Exchange Commission has wrapped up its two-year investigation into Microsoft's accounting practices. The investigation focused on "cookie jar" accounting practices in which a company reports that it earned less money than it actually did, secretly storing the unreported money to artificially boost earnings in the future. The SEC called off its investigation in exchange for Microsoft's promise that it will not break the rules in the future, though the company is not admitting that it broke rules in the past. Microsoft publicly states that it has $40 Billion on hand." Gates realized a long time ago that regardless of actual performance, if you "beat estimates" people will buy your stock. So, he's arranging it so that no matter what the actual performance is, Microsoft always "beats estimates". If your analyst estimate is low 61 out of 63 times, either A) you need a new analyst or B) someone is feeding the analyst bad numbers. In this case, probably both.
In fact the $40 billion in cash puts a floor on how low the stock can go, since the stock shouldn't drop much below the breakup value of the company (what you would get if you bought the whole company, sold off the buildings, etc and took the $40 billion for yourself). Of course with a market cap of $275 billion the breakup value is a long way down.
- adam
The $40B in the bank is NOT owned by the shareholders. Period. It IS owned by Microsoft, a government recognized entity.
Your argument is that since Microsoft is public, the shareholders "own" whatever Microsoft owns ... this is fallacious reasoning, since if YOU owned ... let's say $89 worth of Microsoft, you don't get a copy of Windows for free, in exchange for your shares.
What is owned by Microsoft, cannot ever, be "magically transferred" to the shareholders, just by holding stock.
Now ... lets say that Microsoft decides to throw in the towel, and close operations. The stocks would plummet, and the assets would be sold off to cover the debt. ASSUMING that there was money left over, the rest THEN would go to the shareholders, based on the amount of you have/total shares ...
Usually companies in Microsofts position pay dividends, Microsoft decided not to ... it has that right, and keep the $40B in the bank for a "rainy day" ...
BTW, the $40B doesn't "evaporate" if MS's stock goes down ... ever ... since its shielded from the stock market in banks. Kind of like money laundering. :)
Karma? Karma? I don't need no stinkin' karma.
Yes, but the assumption that is made when a company increases shareholder value is that the company is actually doing something that increases the gdp of the entire country. Otherwise you end up with a zero-sum gain.
So for example, if I am a company that produces widgets, and I develop a way to produce more widgets for the same price, I've increased the value of the company, in that I'll be able to lower the price of my widgets while still increasing the profits of my business. Society benefits by getting cheaper widgets and shareholders should reward that kind of thing.
However, if I don't actually do anything but make it look like I'm perpetually increasing the profits of my company, I'm duping society. You end up with one person getting rich by selling high valued stock, while another person (who buys that stock) gets poor. Nothing is produced. Money is simply changed from one hand to another: the zero sum gain.
In the first example, all of society is richer because of the innovative prodution method that allows them to reap profits which is further rewarded in the stock price. In the latter example, nothing actually improves, money just moves from one person to another, without anyone having had to do any actual work.
Which is fine, I suppose. But I would suggest that we as a society demand that people play by the rules. Specifically that companies get to reap the rewards of being profitable when they produce something that benefits society (as determined by the market). If they don't produce anything new, then they shouldn't be rewarded. If they're using accounting practices that allow a company to reap the rewards of producing something new without actually producing something new, I think we should decide to call that fraud or theft, and treat it accordingly.
$.02.
Key to financial independence: Spend less than you earn. Save and invest the difference. Do it for a long time.
Oh come on the Bill Parish link has holes you can drive a truck through. As an excersice in 3:00AM mental accuity I will attempt to debunk his claims using only his own source/link information.
9 72 6 There actions not reporting stock options as expense or loss is sleazy yet legal.
m l
"Earnings Management"
There is some fishy things going on, but then again the "whisper numbers" many rely on are bogus.
"Speculating on Their Own Stock"
Those put options are two things. Stock splits and stock in employee buy back/employee stock options. Look at his own charts and you will see two obvious things. Firstly more employees were hired and secondly more stock was needed to pay those hires. If MS had gone the other way and bet against their stock or cut hires, then maybe he would have a valid point.
"Convincing Employees to Take Less Real Wages"
Yes there is pork in the laws that allow US companies to run businesses and be traded on the stock markets. But really these laws and rules were passed by elected officials. It's a shame but there is nothing wrong with following the letter of the law.
Hell I was going to go to town on this guy but really he speaks of what should be done versus what is done. Unfortunately he also mistates what should be done instead of what they are obligated to do. Last I looked, an invester that bet on an index fund, was a lazy investor.
Anyways here is the debunking stuff from his own site...
http://www.portlandtribune.com/archview.cgi?id=
http://www.theregister.co.uk/content/4/24068.ht
MS is using the tax system to its maximum advantage AND it is common practice amoung American companies AND many would be hurt by reporting changes AND McCain and others think they should be hurt to help the government and investors.
Oh man sorry it's too lat and I'm dead.
Good points, but:
... it has that right, and keep the $40B in the bank for a "rainy day" ...
Usually companies in Microsofts position pay dividends, Microsoft decided not to
Actually, there is an obscure law that says corporations which have liquid assests above and beyond what they might reasonably need for business purposes must return them to the shareholders as dividends.
This law is regularly ignored; Ralph Nader was complaining about MS and this recently, but so far as I know nothing has come of that.
Why are you blaming Bush for this? This is nothing new! This type of thing happened under Clinton, Reagan, Carter, the other Bush, etc. I remember H&R Block doing this almost 15 years ago.
Karma: Professionally Doomed (mostly affected by inability to keep opinions to self)
Close but no cigar. It is a tax law. It is a tax on accumulated profits which are profits that are accumulated in excess of the reasonable needs of the business. This law is on the books to keep (generally)private companies from accumulating profits for the owners so they can sell the stock and pay tax at capital gains rates rather than distributing the money and having it taxed at ordinary income tax rates (approximately double the capital gains rates). See IRC sec. 531 to 536 and pertinent regs. This law makes directors distribute excess profit since if a public company were assessed this tax the directors would likely have personal liability for the amount of the tax as any fool should see the situation developing and distriute the money. But for this forum you were pretty close!