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SEC Settles Microsoft Accounting Investigation

Posted by ryuzaki0 on from the cooking-the-books dept.

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.

4 of 277 comments (clear)

  1. Analysts are the ultimate sheep! by JohnA · · Score: 5, Interesting
    Sorry to go off on a rant here, but analysts are the biggest farce in the financial industry. Don't take my word for it... see for yourself. Analysts consistenly raise or lower their rating of a company AFTER a major rise or fall.

    Anyone who uses an analyst's recommendations as anything other than a source of humor needs to seriously reconsider their actions. Here's another great example of how "accurate" analysts are. Merrill Lynch is one of the worst.

    Just my $0.02.

    1. Re:Analysts are the ultimate sheep! by kmellis · · Score: 4, Interesting
      I have a friend who's a senior analyst at one of the big banks. He told something that I already knew, but that many people don't.

      The "buy/sell" ratings are unimportant. If you're an investor basing your decisions on ratings, then you're an idiot. It simply isn't true that an analyst's job (even in theory) is to study a company and then come up with a simplistic investment recommendation that's universally applicable. That's not the analysts's chief concern.

      Their chief concern is understanding what's happening with the company. They try to present that understanding in detailed reports and those are what you should pay attention to. The real investors are looking at that, not the rating; and, in fact, they're not really even looking at the report so much as they calling up the analyst and talking about the stock in person.

      If I were in my friend's shoes, which I'm certainly not, because I'm pretty outspoken and a risk-taker, I'd go right to the top of the company and say, "Let's position ourselves as the one that investors trust. Let's stop making buy/sell ratings, and insist that investors and their advisors make decisions based upon our lengthy analysis of a stock, and the personal situation of the investor." I'd either lose the job, or have contributed to a real smart strategic move.

      I'm not defending analysts as much as it may appear. Theoretically, they were supposed to have integrity, and their integrity was compromised at many firms during the boom. Reading Blodgett's emails is enlightening. But day-traders and other retail investors deserve a huge chunk of the blame for jumping into the market as if they were running to the craps table because they thought they were on a hot streak.

  2. Re:Welcome to the world of Income Smoothing by jayed_99 · · Score: 5, Interesting
    You're exactly right.

    Investors do not like to see large variations over a short period of time. Large fluctuations -- either up or down -- skew the statistics they use to make future projections.

    Investors want to be able to make accurate projections. Analysts want to be able to make accurate projections so they can get paid by investors. Companies want to be able to provide the information to make accurate projections so they can get paid by investors. Accountants want their numbers to be conducive to making accurate projections so they have a company to work for. Auditors want their reports to say that accurate projections are possible so they can get paid by companies.


    It's an incestuous system whose sole purpose is making people think that investing is more like monopoly than blackjack.

  3. Re:Welcome to the world of Income Smoothing by Multics · · Score: 4, Interesting
    Income smoothing has been turned into a (questionably) legal art form by General Electric and its former leader Jack Welch.

    This started long before George 'W' and represents a larger than Enron class failure of auditing and business ethics. The point of accounting is to report the accurate state of affairs of the organization, not some CEO/CFO's wishful thinking.

    Generally Accepted Accounting Principles (GAAP) are created and maintained by the Financial Accounting Standards Board (which interestingly doesn't come up with a Google search -- at least when I looked for it). Much of the current round of problems can be laid clearly in their lap.

    The consensus in the auditing community is that the lesson was not learned with Enron and hence an even larger disaster will have to happen before this increasingly corrupt set of practices, auditors, and corporations is revised.

    I'll also note that I am about as pro-business as it is possible to be, but when all of business stands on quicksand because of bogus financials there is the opportunity for just a little shaking causing the whole thing to liquify and slide into the morass.

    -- Multics