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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.
The only time a company has to make its numbers known publicly is in its quarterly reports to the SEC. Any whisper numbers that are passed around by analysts are simply that - whispers.
And you really answered your own question. Why does an analyst guess wrong 61 out of 63 times (in favor of better stock performance)? Because they can make more money that way.
There is something rotten, but it isn't in Redmond. The stench is coming from Wall Street.
I have been pwned because my
Microsoft stock is worth less than 50% of its value about 2 years ago so it doesn't seem to be working anyway.
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.
Remember what Microsoft has been saying all this time regarding software piracy? Since we're talking copies they never made being sold for money they never got, along with losses they've claimed where none physically existed (If you make one million copies of software that sells out, and someone makes one million copies of their own to give away, then they haven't technically lost any money, as they never made that additional one million copies to begin with), I would have to definately say they were using the cookie jar tactic here as well...
Just because you can mod me down, doesn't mean you're right. Shoes for industry!
The real bad guys here are probably the auditors, since they are supposed to find stuff like this and make sure it doesn't happen. People in the know are aware that audited financial statements are just bullshit backed up by a promise that means just about nothing. There is still good info in there, you just need to really read between the lines and pay attention to what the company does not have on the balance sheet.
"It's not a war on drugs, it's a war on personal freedom. Keep that in mind at all times." Bill Hicks
With so much product theft how can they make profits?
:)
"Evaluation = Evolution"
"The SEC called off its investigation in exchange for Microsoft's promise that it will not break the rules in the future,"
Compare: Ok, Mr Dalhmer, we'll not look into the funny smell if you promise not to kill and eat anymore people, while keeping other parts of them for sexual "funning."
See, in the country I live in, we usually prosecute entities (people, companies) when they break the law. We don't just say, "well, don't do it again."
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Internet Explorer (n): Another bug -- that is, a feature that can't be turned off -- in Windows.
Most corporations usually don't have the luxury of beating estimates with large unreported cash reserves. In a twisted way this showcases the strength of Microsoft's business model giving them the ability to ride out the hard times. If I was a shareholder, I would approve so therefore Microsoft is doing what any good corporation should do, increase shareholder value. Obviously the risks of legal action do not outweigh the benefits for the company so in a sense this is just a good business strategy.
A promise? I'm not statisfied with that. I hope they made microsoft pinky swear they wouldn't do it in the future. Or at least say their mom will step on a crack and break her back.
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.
Can I lie to my bank or the taxman and pay no penalty if I promise (when caught) not to do it again in future? Pleeeeeeeeease???? Just this once!!!!!!
Life must be sweet.
-b
He, and others, are simply hacking the economic structure. They insert an extra NOP to better the timing, they tweak their routines. Is it any surprise? Finance is a game, with a huge set of rules, and a very bugger compiler (see if you get my anology). They are not being evil, they are playing the game. As others have pointed out, this is no fault of Microsoft that they are good at it.
Somebody from the SEC ought to have asked the people who got the consent decree out of Microsoft in its first antitrust case just how reliable Microsoft is at keeping its promises. Expect another SEC investigation in a couple of years or so.
Be who you are...and be it in style!
Sorry, but what the fuck? They're "agreeing" to what exactly? To obey the law? To continue doing exactly what they're doing right now (whatever that is)? What kind of "agreement" is this?
Quo custodiet ipsos custodes? I'd be very interested in knowing how many of the SEC people involved in this "investigation" have suddenly found themselves able to pay off their mortgages, or fund their kids through college. And no, I am not joking. When you're dealing with a company with $40 billion in the bank and bad accounting practices, squirreling a couple of million in a slush fund is trivial. I mean, how many people at Microsoft actually believe that they know exactly how much money Microsoft has - and how many different figures would you get if you asked all of these "authoratative" figures?
This "nothing to see here, move along" investigation is a farce. They are either innocent, in which case there's no "agreement", or they are guilty, in which case they should get reamed. This stinks.
If you were blocking sigs, you wouldn't have to read this.
If I even hear someone say "That's just like MS," then you're too young to remember when an OS used to cost $300. Most people don't even "pay" for Windows.
If I'm not mistaken, if you buy a full version of a MS OS (instead of an upgrade version) they still charge about $300.
I think some of the stuff they have done (charging OEMs even for computers where windows isnt't installed, charging OEMs more if they choose to allow alternate operating systems on their computers) is just as bad, if not worse then some of what Enron did.
Still, what microsoft is doing is using shady accounting to artificially inflate their stock price. You might say its creating shareholder value, but that shareholder value comes from more people buying more stock because they are riding a speculative bubble. If the company is leaking money, the investors should know it.
If you are planning on sending your kids to college on someone's stock, shouldn't you have a clear indication of how the company is actually doing?
Should being a monopoly and having lots of cash in the bank negate your respobsibilities to keep your shareholders informed of your finances?
Are you actually a moron, or are you lying on purpose?
IBM and MSFT's past two year performance nearly identical
Now go the fuck away and buy some RHAT stock you fucking idiot.
If the SEC had no case, would Microsoft have accepted the cease and desist? Don't you think Microsoft sees a lot of value right now in being granted carte blanche in a federal case? Wouldn't that provide Microsoft with some much needed ammunition for use in their "we're being oppressed" campaign?
/.ers would have us believe. I am talking about corruption of the type I just mentioned. The "what will George's reaction be next time if I don't do what he wants this time?" kind of corruption - the "if Microsoft isn't here to support me next time, will I have any friends at all?" kind of corruption. Bending with the wind so that you can save your strength for the next battle (and never reaching the battle that is worth fighting). Maybe this isn't even corruption so much as it is weakness, but it is clearly born of friendships and knowing which side your bread is buttered on, and it is surely not in the public interest.
I would submit that what actually occured is closer to your reason number 2, though tainted with reason number 3: Corruption (surely you don't deny that corruption does exist, at least in theory if not in this specific case). To wit:
The SEC sees that Microsoft will invest an enormous amount of money into it's defense. Therefore, the SEC will have to invest comparable resources to make the case. Instead they succumb to the siren song from the Bush administration: "Drop this thing, it's a no-win situation, the DoJ is already putting Microsoft in their place." The SEC weighs it's options: 1. Pursue the case at huge expense and disappoint the President - potentially winning nothing more than a cease and desist. 2. Put on the blinders and issue the cease and desist - keep repeating, "this time they'll play by the rules" to yourself until you believe it - or at least until you can get to sleep.
Bear in mind I'm not talking about corruption in the snidely whiplash twisting his mustache and handing over a satchel with a dollar sign on the side sense. That sort of corruption is far more rare than some
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I think this is the key statement in the story post. There is corruption EVERYWHERE in the finance industry. This includes the government, corporate management bodies, and the people (both in the media and the private finance industry) that make money off of reporting on companies and the government.
Enron is by far not the only company with a corrupt management that artificially inflated their numbers throughout the late '90s and early 2000's. It just happens to be the first company to get caught by the national media red-handed. Nearly every failed dot-com with a successful IPO did the same things Enron did, such as under-reporting liabilities by giving much of their compensation in stock options and B.S.-ing about projected billions of future revenues from customers that would never exist. Other more traditional companies like Xerox and Polaroid have also been caught doing the same sort book-cooking. If it had turned out that Microsoft was not engaging in such accounting tricks, Microsoft's board would clearly be in the small minority of the Fortune 500 in that regard.
The government, both under the Clinton and Bush administrations, did virtually nothing to reform regulations that were being exploited legally but unethically by corporations around the U.S. and also virtually nothing to punish those executives engaging in insider trading and other practices that have been illegal for decades. Had the government stepped in and set some reasonable rules, the boom of the late 90's would have been much more reasonable in scope (Dow 11K and Nasdaq 5K would never have happened, but the gains in stock prices would have still been substantial and, most importantly, justified) and we'd still be in very good economic situation now. Unfortunately, the watchdogs were either sleeping or put to bed (by some well-placed "bones" if you get my drift), and did not attack the biggest ripoffs since the late 1920's that the U.S. stock market has seen.
And the media and the analysts glorified everything that was going on. Back in 1998 and 1999, I was shocked at how many companies' stocks had been given "strong buy" upgrades AFTER A RISE of 20, 30, even 50 percent in the previous month or two. WTF? Any person with a modicum of experience in the market would take such a dramatic increase as an opportunity to cash in a portion of his/her holding in that stock for short-term gain or to stand pat if the holding was for a long term investment. To do as these analysts were suggesting would be essentially refusing to pay $10 for something because it's overpriced, but to buy two of that thing when its manufacture raises the prices to $20. In fact, it has been alleged that some analysts were in fact trading against their recommendations, upgrading stocks that they wanted to take profits on and downgrading stocks that they themselves had wished to accumulate.
As the saying goes, "you can fool all of the people some of the time, some of the people all of the time, but not all of the people all of the time." The "some" time in the first part of that statement began to end in the spring of 2000, and many more woke up following the Enron debacle. Only now are we beginning to understand how broken the regulatory structure necessary for a successful, mostly capitalist (but obviously not pure capitalism) was in the U.S. in the 1990's. Just like it wasn't until after 1900 Americans didn't understand why having an economy dominated by a few "Robber Barons" was bad, or not until the 1930's was it known why having a market based on uninsured banks and buying stocks on margin was bad. Many of the flaws in the U.S. financial system WILL be fixed. At some point, the American people will not accept anything but a good-faith effort to correct these problems. At first, the existing government will be given a year or two to make the required changes. After that, people will begin to demand a "New Deal" and clean house on Capitol Hill. If things don't change significantly by early 2004, the voters will bust out the brooms in November of that year.
However, it is likely that we will endure another period of economic ugliness like we did in the 70s before things brighten signficantly. It took nine years (1973-82) for the U.S. to determine a successful course of action after the end of the Vietnam War required the nation to turn away from a largely military-industrial economy to one better suited for a peacetime environment. My guess is that it will take until at least 2006 or 2007 for the U.S. economy to rationally handle the changes effected by the so-called Information Revolution and prosper again. Things won't be horrible between now and then (barring any further Sept. 11-scale or greater terrorist attacks), but they probably won't be peachy either.
People have rightly questioned the integrity of the entire financial system and are waiting for things to improve before increasing their commitments to it. As a matter of fact, the U.S. is the last major market in the world that has been challenged by investors: while Japan, Europe, and later Latin American and southeast Asia floundered, people flocked to the U.S. believing that our system was infallible. It was not, and never will be infallible, though it has been and will become much more sound than it is today. As the next couple of years unfold, people will gradually learn what the biggest reasons for the unsustainable bubble and subsequent bust were and proceed to try to correct them. After that, people will begin to regain faith in the market, they will begin to realize that current valuations of stocks are by-and-large reasonable again, and the U.S. economy will begin to poke its head out of the clouds.
The stench of corruption right now is everywhere. We're just going to have to give ourselves a while for it to subside.
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)