SEC to probe IBM accounting move

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The Securities and Exchange Commission has launched a formal investigation into an accounting change made by IBM last year.

The move deepens scrutiny of an issue that drew complaints on Wall Street that the technology giant had deliberately confused the market about its first-quarter earnings.

Big Blue revealed the investigation in a filing on Thursday, though it added that the SEC has informed IBM that the investigation should not be construed as an indication that any violations of law had occurred.

The company first disclosed last June that the SEC was conducting an informal investigation.

The case revolves around IBM’s voluntary decision last April to start deducting the cost of employee stock options from its profits – an accounting rule that now applies to all US companies.

News of the accounting change came just days before IBM announced first-quarter earnings that fell well short of Wall Street’s expectations.

Some analysts complained that the way the company made the change confused the market and deflected attention from what was an even worse performance than at first appeared.

Writing in a note to clients at the time, Laura Conigliaro, an analyst at Goldman Sachs, said: “Making matters worse, the fuzziness surrounding IBM’s [option] expensing had
clients asking us what the real number was almost all evening.”

The confusion stemmed from IBM’s announcement on April 5 that it would start to deduct option costs, leading many analysts to conclude that the costs would be similar to the 55 cents a share option expenses of the previous year, with the costs likely to be 14 cents a share in the first quarter.

In the event, option costs in the quarter were only 10 cents a share.

The lower expense helped to offset the impact of a higher pension cost in the period, which would otherwise have put a bigger dent in IBM’s earnings.

However, according to one person close to the company, IBM had told analysts that the higher pension costs would be partly mitigated by the option expenses.

“It’s not good news for IBM but it also doesn’t mean anybody should draw any conclusions,” said Brad Lewis, a former Department of Justice prosecutor and now a partner at the Fenwick & West law firm.

“I would say 60-80 per cent of informal investigations generally become formal ones, so this is not unusual.”

Shares of IBM dipped 1 per cent to $82.71 in extended trading. In regular trade on the New York Stock Exchange, the shares fell 60 cents, or less than 1 per cent, to close at $83.57.

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