SEC Eyeing Recent Inventory Write-Downs by Technology Companies
By Judy Mathewson
Washington, April 27 (Bloomberg) -- The Securities and Exchange
Commission is ``closely following'' a spate of inventory write-downs
by technology companies out of concern the practice may mislead
investors, said Chief Accountant Lynn Turner.
At issue is whether the write-downs, which companies are
supposed to record when inventory is obsolete or devalued, are
being used for material that will still have value if business picks up.
``My concern is that people are taking write-downs now and maybe
later anticipating selling this (inventory) at a profit,'' Turner said in a
telephone interview.
Turner stopped short of saying the SEC would launch an inquiry into
the write-downs. Though he declined to comment on specific
companies, those taking write-downs include Cisco Systems Inc.,
which plans a $2.5 billion charge in the fiscal quarter that ends
today.
``This is truly shareholder capital that's been lost,'' said David Tice,
president of David W. Tice & Associates, a manager of the Prudent
Bear Fund. Tice is known for causing Tyco International Ltd. shares
to tumble by one third in two months in late 1999 when he
questioned the company's accounting.
The SEC's interest in the write-downs at Cisco and other
companies was reported in this morning's Wall Street Journal, which
listed Extreme Networks Inc. Copper Mountain Networks Inc.,
Conexant Systems Inc. and Avanex Corp. and New Focus Inc. as
companies taking inventory write-downs.
`Pro Forma' Statements
The question is whether some of these write-downs will greatly
reduce the value of the inventory on the companies' books -- with the
profit recorded later if demand rebounds.
The companies can also leave the charges out of the ``pro forma''
financial statements they issue in the form of press releases. This
``pro forma'' format, which isn't governed by accounting rules,
enables companies to exclude expenses that must be reported in
regulatory filings, Tice said. That means that in addition to a future
profit that may appear artificially large, the initial cost appears
artificially small.
``The best way to show improved results in the future is to make it as
bad as possible for now and provide for a big bath where massive
charges are taken because Wall Street ignores those charges,'' he
said.
Cisco spokesman Kent Jenkins said the company has done nothing
unusual this year.
``The only thing that has changed this quarter is a very significant
change in demand for some of our products,'' he said. That drop in
demand comes on the heels of the company's efforts last year to
build up inventory to address a parts shortage, he said.
Same Process
``We are using exactly the same process this quarter that we have
used every quarter for years,'' he said. ``That process has been
examined and approved by our auditors. We look at our entire
product line product by product. We estimate what the demand for
each product will be for the next year, and then if we have on hand
parts or supplies that exceed what we would need to produce that
product for the next year, we write them off.''
Agreeing with Cisco is Robert Willens, a Lehman Brothers Holdings
Inc. managing director who specializes in accounting and tax
issues.
``This is something that does come up in business downturns,''
Willens said. ``Write-downs like this are a very accepted and
mandatory procedure in circumstances where the inventory is being
carried on the books at greater than it's net realizable value.''
©2001 Bloomberg L.P. All rights reserved. Terms of Service, Privacy Policy and Trademarks.
quote.bloomberg.com |
