3 June 2003 IBM is under investigation by the US Securities and Exchange Commission (SEC) over revenue recognition on a number transactions in 2000 and 2001.

The probe was instigated by an inquiry at the customer and is centred on IBM’s Retail Store Solutions unit. Although details are currently sketchy, some analysts fear that it could be widened. At the moment, the inquiry is only at the ‘fact-finding’ stage, said an IBM spokesperson.

However, IBM’s accounts have repeatedly come under scrutiny in recent years. In 2000, the SEC criticised IBM for using asset sales to offset administrative costs, without making this clear in its annual report. The SEC also criticised IBM for failing to disclose how much of its revenues came from surpluses on its pension fund.

At the time, IBM refused to amend past filings, but promised to apply the SEC’s recommendations to future financial reports.

Nevertheless, IBM was investigated a second time by the SEC after it booked a $280 million gain on the sale of its optical transceiver business to JDS Uniphase at the end of 2001. That enabled the company to narrowly beat analysts’ estimates, although the company’s stock price tumbled after the news filtered out in early 2002.

Annex Research president Bob Djurdjevic, a consistent critic of IBM’s accounting practices, believes it may just be the start. “Once the SEC account ‘hound dogs’ start digging inside IBM’s books, there is no telling where the scent may take them. The current investigation could be only the tip of the iceberg,” said Djurdjevic.

Djurdjevic has been particularly critical of the accounting practices adopted by former CEO Lou Gerstner. “To his credit, one of the first things that Gerstner’s successor as CEO, Sam Palmisano, address and reversed were some such questionable practices as accounting of intellectual property revenue, stock buybacks and tax-related issues,” said Djurdjevic.