[Am-info] Maybe this should deserve a new fresh lokk?

[Mike Stephen]

>From the Seattle Weekly online:


Microfraud?

                     A Microsoft
                     executive accuses
                     the company of
                     cooking its books.
                     by Mike Romano 

          THE ALLEGATIONS WERE
          shocking: For years, Microsoft has
          systematically distorted its profit
          figures in an effort to consistently
          beat Wall Street expectations and
          keep its stock price steadily rising.
          The false reports would violate SEC
          regulations, and amount to outright
          fraud. 

          More shocking was the source of the
          allegations: Microsoft's chief of
          internal audits, Charlie
          Pancerzewski, who reported directly
          to the company's chief financial
          officer. 

          Most shocking of all was what
          happened to Pancerzewski when he
          reported the suspicious bookkeeping
          to his supervisors, Microsoft CFO
          Mike Brown and chief operating
          officer Bob Herbold, in the spring of
          1995. Soon afterward,
          Pancerzewski--who for nearly five
          years had received stellar
          performance evaluations--received
          his first-ever unsatisfactory one, and
          was eventually forced to resign. 

          Two months ago, Microsoft quietly
          settled a lawsuit containing these
          allegations, filed in 1997 by
          Pancerzewski under the
          Whistleblowers Protection Act. The
          auditor claimed he was wrongfully
          terminated after telling his
          supervisors that Microsoft might be
          breaking securities and tax laws. The
          lawsuit made its tortuous way
          through several rounds of pretrial
          motions until last fall, when US
          District Judge Carolyn Dimmick
          denied Microsoft's final plea for
          summary judgment, finding credible
          evidence that Microsoft may have
          violated SEC rules, as Pancerzewski
          alleged. Shortly thereafter,
          Microsoft and Pancerzewski settled
          out of court. Terms of the agreement
          were sealed, but one source who
          claims familiarity with the case says
          that Microsoft paid Pancerzewski $4
          million. 

          Microsoft and Pancerzewski are
          barred by the settlement from
          discussing its terms, but court
          records, in detailing the accuser's
          allegations, tell a scandalous story.
          Before coming to Microsoft in 1991,
          Pancerzewski was a partner at
          Deloitte, Haskins & Sells (now
          Deloitte & Touche), one of the
          nation's Big Five accounting firms.
          Then=Microsoft CFO Mike Brown
          recruited him to create and lead a
          new department at Microsoft in
          charge of internal audits. Court
          documents show that Pancerzewski
          received highly favorable evaluations
          throughout his first four years in
          Redmond. In one letter to
          Pancerzewski, COO Herbold writes,
          "Your relatively small audit group
          had a significant, positive impact on
          Microsoft's operations, which was
          observed and recognized at the
          company's highest levels." In 1995,
          Pancerzewski was promoted to job
          level 13--near the top of the
          company's employment ladder--and
          given the title of general auditor.
          Later that year, Pancerzewski
          claims, he uncovered potentially
          illegal "monkey business" in
          Microsoft's bookkeeping, and was
          later asked to destroy copies of a
          consultant's report about potential
          company tax liabilities in Europe. 

          Judge Dimmick threw out most of
          Pancerzewski's allegations (including
          the European tax issue and a
          separate age discrimination claim)
          for lack of evidence, but left it for
          the trial to determine the truth of his
          charge that Microsoft fraudulently
          "borrowed" from its cash reserves in
          relatively lean reporting periods and
          hoarded cash in the reserves during
          fatter times, in order to give a more
          orderly appearance to its earning
          pattern. "To grossly oversimplify,"
          Pancerzewski's complaint reads, "the
          setting of a reserve removes the
          amount of the reserve from
          Microsoft's reported income.
          Similarly, when the reserve is
          reversed it has the effect of
          increasing reported income. By
          setting and canceling reserves,
          Microsoft is able to control its
          reported profit and to keep its
          reported earnings on a smoother
          upward trend." 

          Known as a "cookie jar" reserve
          policy, the practice would violate
          Generally Accepted Accounting
          Practices (GAAP) and SEC
          regulations. 

          Pancerzewski reported his concerns
          to his supervisors by e-mail in March
          1995. As Microsoft has learned the
          hard way, electronic correspondence
          creates a surprisingly indelible paper
          trail, and copies of the ensuing
          exchange in the court file show that
          Brown was worried that
          Pancerzewski might have been
          compromising company secrets: "[I]f
          you disclose any confidential issues
          in a non privileged context, you will
          be doing the Company a great
          disservice," the CFO wrote. "All of
          the audit reports you have created so
          far would generally be discoverable
          in the US . . . and could be fertile
          ground for an astute litigator." 

          Shortly after this exchange, Brown
          gave Pancerzewski a surprise
          evaluation--the only one, Microsoft
          concedes, given outside the
          company's regular annual rotation.
          Pancerzewski received his first
          unsatisfactory grade in the report,
          which cited poor communication
          skills. Five months later, in January
          1996, Pancerzewski was invited by
          his boss to a local lunch spot near
          Microsoft's main campus, and was
          given the choice of resigning or being
          fired. 

          THE WHISTLEBLOWERS
          PROTECTION Act covers
          terminated employees who "sought
          to protect the public good, and not
          merely private or proprietary
          interests, in reporting . . . alleged
          wrongdoing." In other words, in
          order to qualify for protection under
          the act, an accuser who claims to
          have been fired for uncovering
          illegal activity has first of all to prove
          that the activity actually took place.
          In the court filings, Microsoft
          maintains that its practices were
          legal, and that Pancerzewski was not
          terminated for raising alarms about
          them. But Dimmick's refusal to
          throw out the "cookie jar" allegations
          signals that there was credible
          evidence--in her mind, at least--that
          Pancerzewski's allegations might
          prove true. 

          In a time when technology stock
          prices swing wildly every quarter,
          when company performance is
          measured against Wall Street
          analysts' predictions, accounting
          fraud of the sort alleged in this case
          has become a high priority at the
          SEC, as was noted in the 12/24 Wall
          Street Journal story headlined "SEC
          Expects More Big Cases on
          Accounting." (Citing commission
          policy, an SEC spokesperson would
          neither confirm nor deny that an
          investigation of Microsoft is under
          way.) In a recent speech at the NYU
          Center for Law and Business, SEC
          chair Arthur Levitt said, "While the
          problem of earnings management is
          not new, it has swelled in a market
          that is unforgiving of companies that
          miss their estimates." Levitt went on
          to cite a "major US company" (not
          Microsoft) that lost more than 6
          percent of its stock value in a single
          day after its reported earnings fell
          one penny short of analysts'
          expectations. "Increasingly, I have
          become concerned that the
          motivation to meet Wall Street
          earnings expectations may be
          overriding commonsense business
          practices," Levitt explained. 


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>From the Desk of Mike Stephen


>From the Desk of Mike Stephen