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Feds look into IBM's earnings, stock compensation

Big Blue says that the SEC has opened an investigation into the company's first-quarter accounting.

Ina Fried Former Staff writer, CNET News
During her years at CNET News, Ina Fried changed beats several times, changed genders once, and covered both of the Pirates of Silicon Valley.
Ina Fried
2 min read
IBM said Monday that the Securities and Exchange Commission has launched an investigation related to the company's first-quarter earnings and how the company accounted for stock-based compensation.

In a filing with regulators, Big Blue said that it has received a request to "voluntarily comply with an informal investigation" by the SEC "concerning IBM's disclosures relating to IBM's first quarter earnings and expensing of equity compensation."

The agency has informed IBM that the informal investigation is "not an indication that any violations of law have occurred," Big Blue said in a press release announcing the SEC's move.

On April 15, IBM announced earnings ahead of schedule, reporting profits below what Wall Street had been expecting. The company reported earnings from continuing operations of 85 cents per share, including 10 cents per share related to the cost of expensing options. Analysts had been expecting a profit, including the stock option expense, of 90 cents per share.

However, some analysts cried foul after the report, saying that their estimates assumed an impact of 14 cents per share from options, based in part on guidance given by the company itself just 10 days earlier. "IBM's options 'hocus-pocus' obfuscates an even larger (earnings) miss--and weaker guidance--than investors might realize," Bernstein Research analyst Toni Sacconaghi said in a research note after IBM's April earnings announcement.

On April 5, the company said it would begin expensing options in its first quarter, following a ruling by a key accounting standards body.

In a slide presented to analysts on a conference call that day, IBM chief financial officer Mark Loughridge had suggested the impact of the options expense would be similar to the 14 cents per share from a year earlier. The slide referred to an "adjusted" average analysts' estimate of 90 cents per share as compared to the $1.04 that analysts had been expecting before IBM's announcement that it would begin expensing options.

The SEC inquiry would appear to be focused on IBM's disclosure about the earnings, rather than the earnings themselves.

"We have no reason to believe at this time that the accuracy of the reported earnings is at issue," said IBM spokesman Clint Roswell.

An SEC representative declined to comment, citing agency policy.