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Microsoft answers financial reporting questions

Microsoft is in settlement talks with the US Securities and Exchange Commission (SEC) to resolve long-standing questions over its financial reporting.

An article in the online edition of The Wall Street Journal published yesterday said that the settlement, which could still take weeks to resolve, would, most likely, end in Microsoft agreeing to abide by SEC guidelines, rather than facing a fine.

The SEC began its investigation of Microsoft several years ago, alleging that the company underreported its earnings in some quarters to bolster results of future earnings.

Yesterday, a Microsoft spokesman in Europe declined to comment on the report, but said, "Microsoft has co-operated fully with the SEC but, because this is not a public inquiry, it's not appropriate to comment further or speculate about the status."

The company first publicly acknowledged the SEC probe during a June 1999 conference call, and has since made note of it in its quarterly earnings statements. But details of the investigation, such as which revenue reserves are under scrutiny, have been scarce.

According to the WSJ, Microsoft is believed to have put aside some of its quarterly earnings so that it could pad out future financial results when the company did not meet expectations. Such smoothing over of financial results, while not a major accounting violation, is seen as misleading to investors.

While the SEC probe has been drawn out for years, recent reports that the agency has stepped up efforts to rein in Microsoft's financial reporting apparently stem from a US government focus on crystallising sometimes murky corporate accounting.

This recent push for corporate accountability was highlighted by the high-profile implosion of energy trading company Enron, whose reckless accounting practices ended in the financial fleecing of thousands of investors.

But, unlike the case of Enron, which has been charged with overstating and sometimes fabricating revenue, the charges against Microsoft appear more benign.

The software maker may have sought to give the appearance of revenue continuity to increasingly fickle investors.

Still, with a heightened focus on corporate transparency, it is doubtful that the SEC has sympathy for the company. According to the WSJ, the commission sent a notice to Microsoft more than a year ago informing it that it could be liable for civil charges.

The report added that Microsoft chairman and chief software architect Bill Gates and other top executives have already given depositions as part of the investigation.

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