Accounting Matter Ethic Insight
Companies would rather report steadily increasing profits than fluctuating profits. To “smooth” earnings, companies sometimes shift the reporting of revenues or expenses between periods’ Wall Street Journal article reported that Microsoft Corp. agreed to settle Securities and Exchange Commission charges that it misstated its earnings in some years by illegally maintaining different “reserve” accounts for such expenses as marketing and obsolete inventory. The settlement did not require Microsoft to pay a fine. Microsoft accepted the commission’s order without admitting or denying wrongdoing and agreed not to commit accounting violations. “The SEC said Microsoft maintained undisclosed reserve accounts totaling between $200 million and $900 million between 1994 and 1998 and didn’t maintain proper internal controls to document them or substantiate their size.” The SEC said that the improper use of these reserve accounts resulted in “material inaccuracies” in the financial reports filed with the SEC. What accounting principles do you think Microsoft violated? What did the SEC mean by “material inaccuracies”? Why would a company prefer to report steadily increasing profits rather than fluctuating profits?