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Bad Books at Microsoft
An Anonymous Coward wrote in with a fascinating story about
Microsoft allegedly defrauding its stockholders and the SEC, and
firing a superb-by-their-own-admission auditor. It'll be interesting to see how this
ends. Of course, Microsoft denying any wrong doing is the short version.
Update: 01/23 10:21 by S :
Link Moved.
Duh. EVERY company cooks its books, this should come as no surprise to anybody. Even if the allegations do prove true it won't effect the stock price. MSFT will degrade on its own as soon as people realize there really is nothing left for Microsoft to take over.
There is one point that everyone seems to be missing about this. Even though M$ was cooking their books, they still had the revenue to back it up. They just hid money away in good times and brought it out again in bad times. For this reason I do not think their stock will suffer, although I really wish something would make them suffer!
Why aren't more insiders going for the $4mil 'keep-your-mouth-shut' prize if MS is as dirty as everyone thinks?
Didn' MS's stock go down like $10 bucks today? I just heard about that as I was reading this article. Hm.
Didn' MS's stock go down like $10 bucks today? I just heard about that as I was reading this article. Hm.
Bullshit. They went down $2 3/8 or about 2%, a typical day for them, you schmuck.
...but if they have, it doesn't matter that everybody else is doing it too. It is still illegal and MS is still going to be in trouble for it.
Of course, other technology stocks are way up. AOL is up $18, Amazon up $24...
The following snippet and text surrounding it is interesting:
"By setting and canceling reserves, Microsoft is able to control its reported profit"
Wonder if that included profit reported to the IRS? I know they take a dim view of irregular accounting procedures.
While not a defense for any harrassment of the auditor, Microsoft's behavior with earnings is unfortunately, all too common. Anyone who invests better be very aware about which companies aggressively use such methods.
For example, Coke has used bottling operations for years to smooth out its earnings growth. Basically, Coke will buy bottling companies when earnings are good, and sell them when earnings are bad, thus smoothing out its own graph over the years to show steady growth. Steady growth == higher stock prices.
A much bigger problem with Microsoft is the extent of the "hidden liabilities" the company has with outstanding stock options. At least one report I've read indicates that if stock options granted by MS were fairly accounted for, Microsoft's profits numbers are nowhere near as good. Basically, use of stock options are allowing the company to hide its true cost of operations. The Microsoft CFO was quoted in Forbes as saying that the outstanding stock options is the biggest problem he is facing right now, and that it's a real bad problem.
Who wants a good laugh? http://www.zdnet.com/zdnn/stories/news/0,4586,2185 912,00.html . come on guys you can trust microsoft. :-)
It is not legal to store money in a corporation as a "bank". I don't know the number of billions that are not allowed...
What they're doing at Micro$haft is trivial compared to what Larry Ellison and his team of creative cooks have been doing for years at Oracle... and Oracle is doing quite well these days, thank you!
(What? You think I'm gonna say stuff like this and NOT be an Anonymous Cowherd?)
Deception -- it's the Microsoft way!
good one. :-)
I have to email cox and linus this story.
It's not that MS planned to mislead but do to a
very rare macro in their spreadsheet program (that
is alrady cured in service pack 7 or 8) that lead
to the miscaclulation. Sorry for the inconvience and the bug will be fixed again after world domination. -- Billy Gates
Microsoft is innocent. They were using MS Excel to do their calculations and it garbled up their data. Plus they were using an Intel FDIV Pentium, and that didn't help either.
I was wondering why MS earnings were so steady for
such a release-driven sales market. MS has been
pushing the envelope, and typically, stepped over
the line. Deceitful.
But there's a bigger story to be told: MS (and
many other firms) _do_not_ include the cost of
Employee Stock Options on their P&L statements.
Even though it is a substantial portion of
employee compensation and a cost of doing biz.
GAAP'd again.
Reports are that MS earnings go red if ESO costs
are included.
Preferably with credible documentation.
Would that be a Generally Accepted Accounting Practices Fault (GAAPF)?
"Your company has caused a Generally Accepted Accounting Practices Fault (GAAPF) and will be terminated"
whee -Me
They've probably just been using their own buggy software to keep track of their finances... :)
I contend that MS cannot continue it's growth. It's stock may be fairly valued, but they cannot continue there 40%+ growth per year, since their market is starting to reach saturation. They can't create the "churn" in their product suite the way they did before (Excel 4 to Excel 97) - the customers won't stand for it. The government will sit on them with this business about tying OS licenses to individual machines. Many businesses will be slowing down OS upgrade purchases while they (we) sort out the Y2K mess. There aren't that many big markets left. On top of things, this news won't help.
When MS stock starts to slack, watch out.
...phil
"For a list of the ways which technology has failed to improve our quality of life, press 3."
I read Jesse Berst's spin of this story on ZDNet's AnchorDesk page, and I'm glad to see less-biased coverage of it. Berst dismissingly calls Pancerzewski "not the most credible accuser" and leaves it at that. It must have taken some guts to report those kinds of findings in a company where dozens of millionaires made their fortunes purely by virtue of its stock price.
Then again, I'm not surprised to see this kind of allegation come out against Microsoft, and I'm even less surprised to see ZDNet jump to their defense.
by *DEFINITION* in a competition, the competitors must try to defeat one another.
otherwise it's not a competition at all!
the DOJ are punishing microsoft for being too successful, and the behest of jealous, incompetent competitors. It's the natural law of the jungle - win or die.
try to read this without bigotry:
http://microsoft.aynrand.org/
I'm breaking rule #2 right now.
-----
The real meaning of the GNU GPL:
"The Source will be with you... Always."
Most companies, specially middle and large size are very much aware of the law, specially with regards of software piracy and illegal accounting practices. I've seen it. Regardless how much I may dislike many pointy-hairs I know, with regard to business practices, they take a lot of pride in doing pristine transactions. They follow appropriate business practices not because of fear of legal retaliation (at least that's not the main reason); they do it because of ethics. At least that has been my impression of pointy-hairs in the U.S. Like in everything, there are always rotten apples in the basket, but I'm firmly convinced that not every company, in fact most of them do not engage in such practices.
No...Only crooked companies "cook" their books. It's extremely illegal. The SEC takes a very dim view of such practices. And investors will be pissed because they were being lulled into buying MS stock on falsehoods...
No...Microsoft is going to really hurt from this if there's anything to it.
If it pans out that this is the case, then watch as Microsoft's stocks take a major dive.
I am not merely a "consumer" or a "taxpayer". I am a Citizen of the State of Texas
Then every dollar of tax revenue would count as a surplus.
Yeah and the more they tax us, the bigger their surplus, the better everyone thinks of the gov't. Silly, ain't it?
--
Aaron Gaudio
"The fool finds ignorance all around him.
"Every man is a mob, a chain gang of idiots." - Jonathan Nolan, Memento Mori
They hire a partner from Deloitte, assign him to internal audit, give him stellar reviews, then show him the door when he notices the (supposedly) illegal activities. Sheesh. Do they think they can hide this activity from an internal auditor (especially a former partner of big 6)?
Fortunately the SEC does not take this behavior lightly. Can't wait to see the results.
To see MS fall because of its own screw ups. Having "the truth" (if this really did happen) come out and investors lose faith in MS (lie once and you will lie again), so MS stock drops, etc. Chain reaction.
If MS is going to get hurt, I would much rather see it be because of this then the DOJ.
Elwood.
Elwood
guess i wasn't the first to submit this story then, since i'm not an AC.
The really really interesting angle about the earnings manipulation story is not that MicroSoft does it, and that the SEC may slap them on the wrists, but that it opens up MicroSoft to a RICO suit. For those of you who dont know what RICO's are, RICO's are anti-racketeering cases.
I've been saying for years that the only real way of stopping MicroSoft is a RICO. The DOJ's anti-trust cases will slow them down but never stop them.
RICO's are beautiful beasts. All you have to do is show a pattern of criminal behavour, you dont have to prove any of the individual charges. And one of the three activities that triggers a RICO is manipulating stock prices. That's how they got the junk bond king Michal Milliken. One year in the mid-80's he was paying himself $550M, three years later he was in jail. If Michael Milliken can go to jail then so can Bill Gates. Gates has more enemies, and more powerful enemies, than Milliken ever had. And MicroSofts pattern of criminal behavour of the last 20 years is very well documented.
It will be a few years before some Federal DA with political asperations launches a RICO attack on MicroSoft (whatever happened to that DA guy Guilliani who brough the case against Milliken...), but when they do, the fur will really start flying. Dont be to suprised if Gates flees the country to his $10M+ house in London.
I think its time to start a MicroSoft RICO Watch web site..
duh :) :)
because there keeping there mouth shut.
and it has happened before.
just no one seems to care all that much about it
In fact I've read a couple of academic papers on this very topic. Here is one dealing with the decision making process for creative bookkeeping. And I'll have to bug Prof. Zeckhauser to get his recent publication on "Earnings Manipulation to Exceed Thresholds" on-line. It's a refreshing piece of data from real companies on earnings manipulations to meet the bright lines of Wall St. earnings expectations and earnings manipulations for private companies just prior to IPO.
And don't expect an external accounting firm to find discrepancies during an audit. They aren't hired to work that way. If BCCI (the Bank of Crooks and Criminals International) could undergo audits from one of the Big 5 and come out clean until a post-mortem, I'm sure that Microsoft could as well.
While I am no fan of Microsoft, this kind of accounting procedure is commonplace, because Wall Street insists that revenue targets be met exactly. This means that most companies do some version of this "cookie jar" trick: move money around from quarter to quarter, build a backlog, recognize revenue earlier or later, all so you get a nice smooth exponential growth curve.
Some forms of this are legal, and some forms aren't so legal. But if Microsoft gets prosecuted for this, then I'm afraid half of Silicon Valley is next.
The argument that this defrauds the stockholder is questionable, because the stock price goes down if this is not done. So maybe you're hurting your stockholders if you don't play as many accounting games as possible. Who knows? The stock market is a fantasy in any case.
The wrongful termination of the auditor is another matter.
You are correct in some sense. Overvalued stock is something comparable to bubble - it can't stand a jab.
The Asian economy suffers today due to stockholder blindly balloning the stock price e.g. The stock vs total Assets ratio is up to 10:1 even 15:1. It is not suprise that a currency attack effectively brings Asian country into turmoil.
...considering that Microsoft specialized in vaporware in the first place. It would make perfect sense, given their history of obfuscation towards customers and technicians, that they'd be pulling a fast one on their shareholders too...
Bill Gates has to be frightened out of his wits now that it's possible that stock prices might deflate and that he may lose his place as the world's richest man...
Finding God in a Dog
I seem to recall Oracle having some BIG problems in this regard somewhere in the late 80's or very early 90's. They tried cooking the books in regard to their sales numbers (the way they credited sales to quarterly results, or some such). They got into BIG trouble for it and, as I recall, were forced to restate their sales (and profit) numbers for several previous quarters.
Needless to say, it turned out they were NOT the 500 lb gorilla business wise that they appeared to be prior to that. Their stock took a major dive, and they had to recover from the debacle to beat out the DB competition that they had.
You can take 2 lessons from that; yes, if proven, the company will take a hit. And there's no guarantee that it will be a long term or fatal hit for a company the size of Mickeysludge.
I'm not sure that this is necessarily a bad thing, and it certainly is not something the government should be involved in. The fact is that every time Microsoft pumps up its earnings to improve its staock price, its stock proce is going to take a hit the next quarter when he stock price is low. It may not be an ideal situation, but I don't know if fraud is the right word for it.
Look at it this way: Who is hurt by it? Certainly the stockholders aren't hurt: their stock price is ultimately going to be the same, only this way there is less volatility. The only person I could see benfitting undfairly from this is insider traders, who have the real profit numbers and use them to make a profit on the stock market.
In any event, this is something that can be handled within Microsoft. If shareholders really don't like it, they can get Bill fired. I suspect, however, that they are happy with the job he's doing, cooked books or no.
I heard some rumors that without this creative accounting one of the quarters in the last 2 years would have shown a loss. Imagine the stock price plummeting in reaction to that...
As an expert witness for Microsoft, he is paid for his time, kind of like a consultant. Now, I wonder how much it's worth to them....
"We'll pay you..um..$1 million an hour for your time."
"Well...OK"
Where do you get this information?
I believe they report this in their annual report and quarterly reports.
How long has it been going on?
Since Microsoft has existed. Basically, instead of paying people actual cash, which decreases their earnings, they pay a little cash plus stock options. This may be the whole point of the charade. To get employees to go along with this, they need the constantly increasing stock price. If they report a bad quarter, the stock goes down, it becomes harder to recruit slaves, I mean employees...
Berst is still a retard. Read his column for a couple of days and you'll see what I mean.
Mark Anderson a great industry analyst that writes a newsletter called Strategic News Service went on the record on March 4, 1998 saying
"Microsoft is just making more money than they can hide.
I've been on the record for a couple of years now, claiming that MS has so
much cash socked away that they can produce any financial results they want
to quarter by quarter.
Picture a bunch of shoe boxes in the back of Billg's office -- no, that's
too small. Picture a bunch of dumpsters in the basement of Building 8 on
the MS Redmond campus, all of them brand new and lined up, numbered, and
locked. Inside, picture compact stacks of thousand-dollar bills, each
dumpster filled to the very top, and the whole basement full of these, with
just a small maze-like walkway space left, just wide enough to get a small
handcart to any or all of these little green private banks.
You'll notice that Billg announced an increase in R and D expenditures last
week, from $2.9B to $4.9B or so. Big hit to earnings, right? You see,
they have run out of space in Building 8's basement ---
Of course, I am only half kidding.
It is really hard to hide that much money."
His comments were of course not issued in the context of the GAAP/SEC violations, but his views have become widely held in the industry.
Now we get to sit back and watch the circus come to town (or perhaps leave town if the allegations are un-provable)
"Although we may build the technology that we define as tools, we must be vigilant that those tools do not define us."