Microsoft and SEC Settle 'Cookie Jar Accounting' Case

On June 3, 2002, the Securities and Exchange Commission (SEC) announced the settlement of an administrative enforcement action against Microsoft Corporation. The case involves allegations that Microsoft used "cookie jar accounting" to smooth earnings through adjustments to reserves.

Commissioner Isaac Hunt explained to Reuters, "It's a cease-and-desist order. They’ve agreed not to do it in the future." The cookie jar allegations are a relatively minor violation, and the settlement does not result in a fine for Microsoft. The case is unusual compared with other cases of alleged earnings manipulations in that it involves understatements, rather than overstatements, of revenues.

According to Reuters, the statement puts an end to a multi-year investigation that started with a wrongful termination lawsuit brought by a former company auditor and settled in 1998. In court, the former auditor's attorney cited an e-mail to Chairman Bill Gates from then-Chief Financial Officer (CFO) Mike Brown. The email said, "I believe we should do all we can to smooth our earnings and keep a steady state earnings model."

Mr. Brown served as Microsoft's CFO during the "tornado" years when the company made its initial public offering and grew to be one of the country's largest corporations. Under the leadership of Mr. Brown and his successors, Microsoft has consistently pleased its investors and analysts with steady revenue and profit growth, and it has seldom (if ever) missed its earnings forecasts.

A Microsoft spokesman told the Wall Street Journal, "We take our financial reporting responsibilities very seriously, and we work hard to comply with every aspect of the company's reporting obligations."

-Rosemary Schlank

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