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DOJ looks into Network Associates books

The security software firm says the Department of Justice has joined an SEC investigation into its accounting and adds that it will restate earnings for 1998, 1999 and 2000.

The U.S. Department of Justice will join an ongoing Securities and Exchange Commission investigation into Network Associates' accounting.

The security software company announced the Justice Department's involvement on Wednesday and added that it plans to delay filing its annual report, known in financial terminology as a "10-K," so it can restate earning for fiscal years 1998, 1999 and 2000 to take into account information from the investigation.

"We don't know when (the Justice Department) became involved," said Jennifer Keavney, a spokeswoman for Network Associates. "We became aware of their investigation this quarter, so we are disclosing that as required. But how long they have been involved, we don't know."

An official from the Department of Justice wasn't immediately aware of the investigation and could not comment. Network Associates stock dropped from $15.38 to $15.02, a fall of 2.3 percent, by late afternoon Wednesday.

The Santa Clara, Calif.-based company's restatement of earnings is result of a shift in accounting methods and is unrelated to a correction that the company made 10 months ago arising from errors in tax filings, said Keavney.

In light of new information from the investigation, Network Associates has decided to shift all its accounting from a "sell-in" model, where products shipped to distributors and partners are considered sold, to a "sell-through" model, where only the products sold by distributors and partners are taken into account in revenue calculations.

The company had started to count revenue from "sell-through" from the quarter ending in December 2000, said Keavney, but previous years had still been accounted for using the "sell-in" method.

In late December 2000, Network Associates stock plummeted 68 percent to $3.75 after the company announced a revision in its accounting practices would turn an expected operating profit into a net operating loss. The company chalked up nearly $190 million, or $1.07 a share, in operating losses for the final quarter of 2000. Previously, analysts had been forecasting a gain of 31 cents a share for the quarter.

The financial reversal came as a result of a change in accounting procedures. Network Associates estimated the change to "sell-through" accounting would strip $120 million--almost 14 percent of its previously estimated annual revenue--from its coffers, until it could close the sales.