Defending the bottom line

A sweeping Securities and Exchange Commission examination of corporate accounting practices has reached into the Internet and high-technology industry.

Last month, Net security firm CyberGuard said that it would restate its third-quarter financial results and even moved to suspend its chief executive and chief financial officer, prompting the SEC to inquire about the company's financials.

"The SEC had called and asked some questions pertaining to our potential refiling of our third-quarter [results]," a spokeswoman said. "There is currently no SEC investigation going on to our knowledge."

CyberGuard is an extreme example, but it is one of a growing list of companies that are restating their financial numbers or undergoing SEC scrutiny for certain one-time charges. The queries are part of a fact-finding mission begun in August to examine the accounting practices of U.S. businesses.

Some analysts blame the spate of special charges and restated earnings on the recent bull market that had driven high-tech and Internet stocks to dizzying heights. The high valuations on many of these stocks, some of them with no earnings, leads to tremendous pressure for companies to live up to expectations.

"You certainly don't want to come in under earnings estimates; but for Internet companies, even being on target isn't terrific," said David Simons, managing director of Digital Video Investments, an institutional research firm. "The objective is to provide reason to keep valuations pegged to expectations for two or three years."

Neither the SEC nor Wall Street analysts have accused any specific companies of wrongdoing as part of the investigation. But the charges are drawing wide attention beyond Washington because earnings propel a company's stock price.

"Our concern arose based on the number of companies that either have announced they are going to restate something that they accounted for, or accusations of misdeeds in terms of accounting at the company," SEC spokesman Duncan King said. "We're just trying to figure out where there is a breakdown--if any--in terms of accounting practices."

The SEC's chief accountant, Lynn Turner, is assessing accounting practices related to one-time charges and research and development. The agency declined to talk about the accounting practices of any specific companies or industry.

The SEC has been meeting with executives and accountants to discuss the trend. Some analysts speculate that the inquiry could lead to tighter accounting rules.

"We haven't made any pronouncements or come to any conclusions yet," said Chris Ullman, director of public affairs at the SEC. "We are trying to figure out if some of these issues are genuine problems or if they are systemic to public companies in general."

Recent major accounting problems at companies such as Cendant and Sunbeam have drawn intense public scrutiny, but some high-tech and Internet stocks have been the focus of attention as well, though their problems appear minor by comparison so far.

For example, 3Com was criticized by some analysts earlier this year for restating earnings related to its merger with U.S. Robotics following an SEC review. 3Com said the changes were based on generally accepted accounting standards.

So-called Internet companies have also been approached by the SEC for clarifications about their accounting practices.

America Online said last month that it could not disclose its net income because it was in discussions with the SEC about some special charges. The issues in question are related to research and development at Mirabilis and NetChannel, companies AOL recently acquired.

AOL said it was prepared to report its full earnings but decided to wait. "The treatment of in-process research and development is something that the SEC has been paying more and more attention to lately," an AOL spokeswoman said. "We wanted to reach out to the SEC in advance to give them an opportunity to review the accounting treatment for our acquisitions."

There are no new developments in the discussions between AOL and the SEC, and the online company still has not scheduled a date to release it full earnings statement for the last quarter, the AOL spokeswoman said today.