Report: Microsoft, SEC in Financial Reporting Settlement

According to a report in The Wall Street Journal, Microsoft is set to resolve a Securities and Exchange Commission (SEC) investigation into the company's accounting practices. The settlement will finally resolve a years-long complaint that Microsoft misrepresented its financial statements to maintain artificially steady profit and revenue growth.

Rumors about Microsoft's financial misdeeds date back to the early 1990s, when increasing Windows sales drove the company's profits through the roof. At the time, Microsoft adopted a policy of padding future financial results by deferring profits from its successful Windows and Office product lines. Then, during quarters that were financially disappointing, Microsoft reported parts of the deferred profits, effectively smoothing out the company's perceived growth.

The SEC began its investigation into the company after a former Microsoft auditor launched a wrongful-termination suit in 1997 and alleged that the company's so-called deferred-profit policy violated SEC rules. The auditor said the company fired him for speaking publicly about the policy, which Microsoft officials internally referred to as "smoothing."

Because this deferred-profit policy is a murky legal issue, the settlement will reportedly address lesser charges, and the SEC won't fine Microsoft for its transgressions. According to The Wall Street Journal, Microsoft will admit only that it failed to keep accurate records and will pledge to abide by SEC accounting rules. The company modified its deferred-profit strategy when the SEC investigation began more than 3 years ago and says that it now legally represents its financial condition. "We take our financial reporting responsibilities very seriously, and we work hard to comply with every aspect of the company's reporting obligations," a Microsoft spokesperson said this week. "Microsoft has cooperated fully with the SEC but because this is not a public inquiry, it's not appropriate to comment further or speculate about the status [of the investigation or settlement]."