Auric,
Might this be the pin that pricks the bubble?
dailynews.yahoo.com
Friday March 24 6:40 PM ET
SEC Makes New Accounting Standards
By NOELLE KNOX, AP Business Writer
NEW YORK (AP) - The Securities and Exchange Commission is cracking down on the ``game of nods and winks' some companies play to make their revenues and profits match rosy projections.
As hundreds of companies scramble to comply with the new SEC accounting guidelines designed to give investors a more accurate picture of how a company is performing, investors are bracing for some bad surprises.
On Friday, the SEC gave most companies until June 30 to comply, a three-month extension from the original March 31 deadline.
The stricter standards are being imposed at a time when public companies are under extreme pressure to report steadily rising profits in order to justify the stock market's current lofty valuations. For Internet startups that don't have any profits, the ability to show strong increases in revenues is key.
Shares of several smaller technology companies were beaten down this week amid fears the accounting changes will produce worse-than-expected financial reports. The guidelines will also affect blue-chip companies like Wal-Mart Stores Inc. (NYSE:WMT - news) and UAL Corp. (NYSE:UAL - news), the parent of United Airlines.
An early casualty was MicroStrategy Inc. (NasdaqNM:MSTR - news), which saw its shares plummet 62 percent Monday after the computer software company said it had to restate its financial results for the past two years because of the new guidelines. (The company later revised its explanation and said it was complying with a 1997 accounting rule that addressed a related problem.)
The revisions were needed because MicroStrategy said it had counted too large a portion of revenue from multiyear contracts in the first year rather than spreading those revenues over the length of the deals. The change erased all of MicroStrategy's profits for 1999, producing a loss on its books. The company said its long-term prospects remained good, regardless of when it counts revenue from its contracts.
The sudden shock of MicroStrategy's stock market selloff caught several high-technology companies in the downdraft. Shares of Covad Communications Group Inc., Infospace.com Inc. and Ventro Corp. all fell this week.
While Covad and Infospace took steps to reassure skittish shareholders that the companies' books meet the new guidelines, the average investor has little way of knowing if a company is fudging the numbers.
``It's really difficult from publicly available disclosures to determine who will be the next one,' said Janet Pegg, an accounting analyst with Bear Stearns & Co., who published a report on the topic. ``There's a lot of concern and there's no obvious way to get any comfort.'
Since the Securities and Exchange Commission issued the guidelines in December, at least 63 companies have changed their accounting practices and at least 66 more companies have warned investors they are still evaluating the potential impact.
In that second group is Ventro Corp., an Internet company that sells technology research equipment and materials to businesses. Ventro, formerly Chemdex, recently told investors in a public filing, ``If we are required to change our accounting policies, we may in the future report substantially lower revenues, and we may be required to restate the results from earlier periods. This could cause the market price of our common stock to fall significantly.'
Ventro's stock fell 31 percent this week, closing Friday down $5.433/4 at $108.621/2 on the Nasdaq Stock Market.
Executives for Ventro, who are preparing to sell more stock, declined further comment citing the SEC mandated ``quiet period' in advance of a stock sale.
The new guidelines are designed to stop businesses from massaging their financial records.
Too many companies are operating in ``a gray area where the accounting is being perverted; where managers are cutting corners; and, where earnings reports reflect the desires of management rather than the underlying financial performance of the company,' said Arthur Levitt, chairman of the Securities and Exchange Commission, in a 1998 speech. ``Too many corporate managers, auditors and analysts are participants in a game of nods and winks.'
So last December the SEC issued a Staff Accounting Bulletin 101, which effectively put companies on notice that regulators are taking a hard line on when companies may count revenues and costs for projects under way or products under contract.
A retailer, for example, can't take credit in its books for the sale of a bedroom set or a blouse on layaway until payments are received. Many big names like Wal-Mart and The Limited Inc. have said they will take charges in the first quarter.
As will several airlines, which have to change the way they calculate revenue from their frequent flyer programs.
Still other companies, like defense contractor Raytheon Co. (NYSE:RTNa - news), will have to restate financial results for the past three years, effectively wiping out $40 million in profit.
While in many cases the changes seem academic and they don't effect a company's cash flow, the tighter accounting standards may cause quite a few companies to miss Wall Street's estimates for quarterly profits.
``There are going to be some surprises,' said Bear Stearns' Pegg.
KJC |
