Microsoft Consents to SECs Cease-and-Desist Order

By Peter Galli  |  Posted 2002-06-03 Print this article Print

The software maker agrees to stop using an accounting practice the Securities and Exchange Commission said resulted in the company misstating its income by material amounts between July 1994 and June 1998.

Microsoft Corp. on Monday agreed to stop using an accounting practice that the Securities and Exchange Commission said resulted in the software company misstating its income by material amounts between July 1994 and June 1998. In a statement issued on Monday, the SEC said it brought a settled administrative enforcement action against Microsoft ordering the company to cease and desist from committing accounting violations and other violations of federal securities laws. While Microsoft consented to the cease-and-desist order, it did not admit or deny the findings that it had maintained seven reserve accounts containing a total of $200 million to $900 million in unsupported and undisclosed reserves.
The order brings to an end the SECs two-year-long investigation of Microsofts alleged "cookie jar accounting" practice, where reserves are held to be used to pad revenue during lean times.
In the order for the proceeding, the SEC found that Microsoft had maintained seven reserve accounts in a manner that did not comply with Generally Accepted Accounting Principles (GAAP). The SEC also found that Microsoft did not properly document the bases for these accounts and failed to maintain proper internal controls, as required by the federal securities laws. A Microsoft spokesman said in a statement that the agreement had no impact on its reported financial results, would not require the restatement of any reported financial results and involved no financial penalty. "The company is pleased to have resolved these matters with the SEC and looks forward to an open and constructive working relationship with the SEC on important accounting issues affecting the software industry," the statement said. But Stephen Cutler, director of the SECs Enforcement Division, said the case emphasized that the SEC will act against a public company that issues financial statements with material inaccuracies, even in the absence of fraud charges. "Public companies must ensure that their accounting is substantiated in the first instance by factual bases and well-reasoned analyses and conclusions. "In order to do so, companies must properly document the bases for their reserves and other accounting entries, so that they and their auditors can verify that the accounting is proper; and they must maintain appropriate internal controls, so that this verification will occur in the normal course of business," Cutler said.
Peter Galli has been a financial/technology reporter for 12 years at leading publications in South Africa, the UK and the US. He has been Investment Editor of South Africa's Business Day Newspaper, the sister publication of the Financial Times of London.

He was also Group Financial Communications Manager for First National Bank, the second largest banking group in South Africa before moving on to become Executive News Editor of Business Report, the largest daily financial newspaper in South Africa, owned by the global Independent Newspapers group.

He was responsible for a national reporting team of 20 based in four bureaus. He also edited and contributed to its weekly technology page, and launched a financial and technology radio service supplying daily news bulletins to the national broadcaster, the South African Broadcasting Corporation, which were then distributed to some 50 radio stations across the country.

He was then transferred to San Francisco as Business Report's U.S. Correspondent to cover Silicon Valley, trade and finance between the US, Europe and emerging markets like South Africa. After serving that role for more than two years, he joined eWeek as a Senior Editor, covering software platforms in August 2000.

He has comprehensively covered Microsoft and its Windows and .Net platforms, as well as the many legal challenges it has faced. He has also focused on Sun Microsystems and its Solaris operating environment, Java and Unix offerings. He covers developments in the open source community, particularly around the Linux kernel and the effects it will have on the enterprise.

He has written extensively about new products for the Linux and Unix platforms, the development of open standards and critically looked at the potential Linux has to offer an alternative operating system and platform to Windows, .Net and Unix-based solutions like Solaris.

His interviews with senior industry executives include Microsoft CEO Steve Ballmer, Linus Torvalds, the original developer of the Linux operating system, Sun CEO Scot McNealy, and Bill Zeitler, a senior vice president at IBM.

For numerous examples of his writing you can search under his name at the eWEEK Website at


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