A couple of months ago, it was revealed that Microsoft had settled an inquiry by the Securities and Exchange Commission over its misstatement of income. In times when Microsoft earned more money than it wanted to, it had been putting some of the money in reserve, so it could "earn" it in later quarters when the numbers weren't looking so good. It was not a one-time event: the misstatements occurred over a four-year period from 1994 to 1998. And the amounts were not small: almost $1 billion at times, for a company that typically has annual income between $5 billion and $10 billion.
Despite this, you never hear much about this. It's not like there isn't an opportunity. Besides the standard Microsoft-bashers, the current spate of accounting scandals has given every writer looking for a lead paragraph a chance to recite a litany of corporate evildoers: Enron, Worldcom, Arthur Andersen, Global Crossing, Tyco...but not Microsoft! CNN's special
corporate fraud scorecard doesn't mention Microsoft at all.
There are some differences in the Microsoft case. The inquiry has been settled; nobody is going to jail; Microsoft was not fined or charged with accounting fraud; nor was the company required to restate its financial results. The price of the stock was unaffected, and obviously the company is nowhere near bankruptcy. To the SEC and Wall Street, this is not nearly as serious as the other cases.
And Microsoft defenders are quick to point out another key difference: Microsoft was guilty of understating its earnings, not overstating them. That is, it was shifting earnings from the current quarter to a later quarter. When Worldcom booked regular expenses as capital expenses, it was shifting earnings from a later quarter to the current quarter (since the capital expenses would eventually need to be expensed over time, thus hurting every future quarter in which this was done).
Still, while it is nice that Microsoft was taking a long-term approach to cooking the books, there really isn't a whole lot of difference in philosophy here. In both case, earnings are being improperly shifted from one quarter to another. Does it really matter which direction, in time, the shifting is done?
More importantly, the fact that Microsoft was doing this shows it was too focused on its stock price. Microsoft is a publicly traded corporation and has a duty to provide value to its shareholders, but it is the business of producing software. Once it decides it is instead in the business of producing a nicely sloped stock price, it is losing its focus on its real business. As Microsoft employees we were always told to keep making great software and the stock price would take care of itself; but now it seems that upper management decided the stock price needed a little help.
To me, this seems the first truly indefensible thing Microsoft has done. Many will laugh at that statement, but I can see a reason behind every action. Take the antitrust lawsuit: since the company was only determined after-the-fact to be a monopoly, how was it supposed to behave? If it had held back merely on the possibility of being a monopoly and then the courts had later ruled that it wasn't one, wouldn't that have meant that it was being needlessly cautious and possibly hurting itself? But the "reserve" accounts were obviously meant to be deceptive; Microsoft made no attempt to defend itself or claim the reserves were legitimate in some way, and I'm sure was relieved that the only punishment was promising not to do it again. So why did the company do it in the first place?
The reason, of course, is that Microsoft wanted the stock price to go up to keep shareholders and stock option holders happy, but it also didn't want it to go any faster than necessary. After all, any excess gains would just make it harder to keep growth rates up in the future. And continued stock option gains were the carrot on the stick that kept so many employees working at Microsoft.
Not the top employees, however. Bill Gates recently pledged that neither he nor CEO Steve Ballmer would ever take stock options. Gee Bill, that's easy for you to say, when you received about 50 percent of the shares when the company was incorporated, and Ballmer almost 8 percent (their portions are now down to 12 and 4.3 percent, respectively). Who needs options when you already have so much equity? More important question are: Does Jim Allchin get options? Does Jeff Raikes get options? Did Rick Belluzzo get options before he left? The answers, of course, are yes, yes, and yes.
Such fake sincerity about stock options has got to stick in the craw of many Microsoft employees, now that the stock is down to 1998 levels, 20 points below what it was at when Ballmer gave everyone extra options as a morale booster. Let's face it, it's the kind of thing that...that...that Scott McNealy or Larry Ellison would say. Microsoft employees are proud of the fact that their leaders are more dignified than those two, rarely spouting off in public or denigrating the competition. During the antitrust trial, employees were sustained by their belief that the company was a good, honest company, led by good, honest people. But with the revelation of accounting shenanigans, sometimes you have to wonder.