CSCO inventory: I do believe that criminality would depend on intent in these matters, and there is really no clearcut way for us to prove or disprove that here.
And yes, bookkeeping classifications are made in error all the time, and market conditions could change to invalidate previous assumptions. BUT:
1. If you are running a company and you decide to write off a huge chunk of inventory because you believe it is out of date, why would you still keep this inventory around? In fact, a reasonable standard for when it is appropriate to write of the inventory could be "when you are ready to destroy it". So at the very least we are seeing a judgement that the likelihood of the inventory being useless is high enough to write it off, but NOT high enough to get rid of it. Is this OK? I think not.
You might say, well, they had it sitting in a shack by the railroad tracks and just did not get around to getting rid of it. But a company like Cisco does not just store stuff for no good reason. Whatever happened to all the 'just-in-time' efficiency that made the nineties great? If it is really considered useless, it would not be around for them to change their minds..
2. The correct way to deal with changing your mind for a good reason (or even due to a stupid mistake-happens all the time) is to immediately reverse your bookkeeping entry. In other words, if you said in Q2 that the inventory is worth zip and took a special charge for this, and then discovered in Q3 that you may in fact be able to sell it (and you miraculously are still in possession of it), you record a one time revenue item in Q3 to mark the inventory back up to whatever you now think it is worth. Then when you sell the stuff you have a fair approximation of Cost Of Goods Sold, and since you will probably not sell it all in one quarter, you have the correct asset valuation on your books.
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The reason this all DOES matter(IMO), is that a one-time charge to write down inventory is ignored by many when evaluating earnings -so it does not damage the quarter when it is written off all that much. Then when the stuff is sold later, costs are artificially lower, and earnings and gross margin look great. Not to mention that in any case it is potentially a way to shift costs from a weak quarter to a stronger one. This, considering that millions of investors (and not only those in CSCO) hang their fortunes on the earnings #s, is manipulative to say the least. |
