Video Game Industry Facing SEC Probe

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Activision Inc., THQ Inc., Acclaim Entertainment Inc. and Midway Games Inc. have disclosed that the SEC has requested information from each of them, indicating a wide-scale investigation may be under way into accounting practices in the video-game software publishing sector.

No one is commenting on what the investigation is covering but one industry analyst speculated to UPI that the SEC might be looking at whether the industry has been understating revenue so it can artificially inflate earnings later. Stocks of all four companies fell on the news of the SEC inquiry.

The companies, which publish games for Sony Corp.'s PlayStation 2 and Nintendo's GameCube, among others, told the Los Angeles Times that they are cooperating with the probe. The industry leader, Electronic Arts Inc., was not named on the list of companies facing SEC scrutiny.

Activision's filing stated that, "The investigation appears to be focused on certain accounting practices common to the interactive entertainment industry, with specific emphasis on revenue recognition," another way of saying when companies choose to record sales on their books.

Michael Pachter, a research analyst with Wedbush Morgan Securities Inc. in Los Angeles, told the Washington Post that he sees no threat to the industry from the SEC inquiry.
"I think that the probe is literally just the SEC trying to determine whether the interest of investors is being served by industry practices," he said. "There's definitely no smoking gun here…I think these companies are all running their businesses above board."

The SEC's probe into Take-Two Interactive Software Inc. was ongoing before the probe widened to a broader look at the industry. Take-Two, publisher of the Grand Theft Auto games, last year restated seven quarters of earnings to account for sales that had been shown as revenue but were later returned or repurchased by the company.

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