SEC ends preliminary probe of IBM

update The U.S. Securities and Exchange Commission opens and closes a preliminary investigation of IBM's accounting practices.

Larry Dignan
2 min read
update The U.S. Securities and Exchange Commission said Thursday that it had opened and closed a preliminary investigation into IBM's accounting practices.

The statement was in response from private research firm SEC Insight, which reported that the SEC had started a new investigation of IBM's accounting practices. The SEC typically doesn't comment on investigations.

Talk of the possible inquiry rattled shares of IBM, which fell $4.82, or 5.4 percent, to $84.19. In after-hours trading, IBM recovered most of Thursday's losses.

"This is good news for IBM and accounting concerns should fade," said Merrill Lynch analyst Steven Milunovich in a research note Friday.

In a report published Thursday, SEC Insight said the SEC had started a preliminary investigation of IBM's accounting and disclosure. In an e-mail response to a CNET News.com inquiry, SEC Insight President John Gavin confirmed the report.

"It does appear that this new inquiry is unrelated to a long-running investigation of the company as that probe actually ended on Feb. 13, 2002," Gavin said. SEC Insight, based in Plymouth, Minn., tracks the correspondence sent between the SEC and companies that generally isn't disclosed or released.

Gavin said it wasn't clear what the new inquiry was about, but it started on Feb. 15, the same day The New York Times published a story on IBM's accounting.

An IBM representative said that Big Blue doesn't comment on its relationship with government agencies.

It's been a rough week for IBM on Wall Street. On Monday, the company issued its first profit warning since 1991.

The company said it expects to post a profit of between 66 cents and 70 cents per share, or between $1.65 billion and $1.75 billion, with revenue coming in at between $18.4 billion and $18.6 billion. Analysts were expecting Big Blue to post a first-quarter profit of 85 cents per share on revenue of $19.65 billion, according to First Call.

Analysts said the profit warning may have at least partly stemmed from calls for more accounting disclosure. In recent quarters IBM has used nonoperational financial items such as tax rates and pension fund gains to produce strong results, but Wall Street has frowned on the use of those financial levers.

That fact eliminates IBM's ability to use such financial items to offset weak sales, analysts said.

"We believe (IBM's) preannouncement reflects reduced flexibility, in part stemming from increased disclosure requirements," said Prudential Securities analyst Kimberly Alexy.

Worries about IBM's accounting practices have rattled shares of late. It was recently reported that the SEC requested that Big Blue amend its 1999 annual report and its first-quarter report. The matter was resolved without the company having to amend the reports.