Microsoft Consents to SECs Cease-and-Desist Order

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.