Out-Law News 1 min. read

SEC settles with Microsoft over understated earnings


Microsoft broke federal securities laws by understating its earnings between 1994 and 1998, according to the US Securities and Exchange Commission. The company was this ordered to cease and desist from making any future violations.

The SEC found that Microsoft had maintained seven reserve accounts in a manner that did not comply with Generally Accepted Accounting Principles (GAAP) because, to a material extent, they did not have “adequately substantiated bases”.

As a result, Microsoft misstated its income by "material amounts" in certain filings with the SEC over the four-year period. The aggregate balance of the seven accounts ranged between $200 million and $900 million.

The SEC also found that Microsoft did not properly document the bases for these accounts and failed to maintain proper internal controls, as required by federal securities laws.

The SEC said that the company’s practices did not amount to fraud, which can occur when earnings from strong periods are hidden in so-called “cookie jar” accounts to boost profits during weak periods, if this is done in a way that misleads investors. Xerox was recently fined $10 million by the SEC for misleading investors in a similar way.

Stephen M Cutler, Director of the SEC’s Division of Enforcement said:

"Public companies must ensure that their accounting is substantiated in the first instance by factual bases and well-reasoned analyses and conclusions. In order to do so, companies must properly document the bases for their reserves and other accounting entries, so that they and their auditors can verify that the accounting is proper; and they must maintain appropriate internal controls, so that this verification will occur in the normal course of business."

Microsoft agreed to stop the practice without either admitting or denying guilt. It was not fined.

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