US investigates IBM over Irish, UK and US accounting practices

The US Securities and Exchange Commission (SEC) is investigating how IBM recognised revenue for certain deals in the US, Britain and Ireland, the company has revealed.

IBM, the world’s largest technology services company, said it learned of the investigation in August and was co-operating with the SEC, but did not disclose what deals were being probed.

An IBM spokesman said the company had a “rigorous and disciplined process” for its reporting of revenue. Shares of IBM fell as much as 4.4 per cent to a five-year low of $137.33 and closed down 4 per cent in the US last night.

News of the SEC investigation came a week after the company posted lacklustre quarterly results and cut its 2015 profit forecast. "It couldn't come at a worse possible time because now the stock is at another 52-week low as a result of this," said Belpointe analyst David Nelson.

He said, however, that the investigation “doesn’t look like a massive smoking gun.” “The investigation could be into warranty reserves, they could have recognized an item at the wrong time,” Mr Nelson said.

IBM has been a subject of several SEC investigations in the past, including a 2013 investigation on how it reported revenue from its cloud computing business. Regulators ended that investigation without recommending any action.

Earlier this month, the SEC called financial reporting “a key enforcement priority” as it announced a series of enforcement actions for violations of federal securities laws.

Revenue recognition is how a company records revenue on its books, with discrepancies often arising depending on whether cash is received, or payments deferred.

Accounting rules differ in the US and in Britain and Ireland. A May 2014 change in the accounting standard for revenue recognition has increased scrutiny by regulators.

Some 60 per cent of SEC actions from 1998-2007 focused on improper revenue recognition, according to a 2010 report by COSO, a committee with representatives from private-sector accounting and other professional groups that studies fraudulent financial reporting.

Separately, IBM also authorised a $4 billion share buyback on Tuesday, in addition to $2.4 billion remaining from a previous share repurchase program announced last October.

Shares of the IBM have dropped steadily in recent months, falling 21 per cent since hitting a year high of 173.97 in April.

Last week, IBM posted a bigger-than-expected drop in third-quarter revenue and cut its full-year profit forecast as a stronger US dollar accentuated weakness in demand from China and emerging markets.

Reuters