The SEC found that Microsoft had maintained seven reserve
accounts in a manner that did not comply with Generally Accepted
Accounting Principles (GAAP) because, to a material extent, they
did not have “adequately substantiated bases”.
As a result, Microsoft misstated its income by "material
amounts" in certain filings with the SEC over the four-year period.
The aggregate balance of the seven accounts ranged between $200
million and $900 million.
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 federal securities laws.
The SEC said that the company’s practices did not amount to
fraud, which can occur when earnings from strong periods are hidden
in so-called “cookie jar” accounts to boost profits during weak
periods, if this is done in a way that misleads investors. Xerox
was recently fined $10 million by the SEC for misleading investors
in a similar way.
Stephen M Cutler, Director of the SEC’s Division of Enforcement
said:
"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."
Microsoft agreed to stop the practice without either admitting
or denying guilt. It was not fined.
