IBM shares tumble on accounting woes

The panic started on Friday when IBM dropped $5 to $102.89 after the New York Times reported the company’s latest quarterly report used non-standard accounting methods regarding the sale of its optical transceiver business to JDS Uniphase. That sale generated $300m for IBM.

The report said IBM ‘did not provide details of the sale of a business unit to lower its operating costs to investors or account for it as a one-time gain, as is the practice.’ Instead it reported the sale as intellectual sale profits.

The report also quoted analysts as saying that using the gain to offset expenses, taking into account the company’s tax rate, could have boosted earnings by as much as 12 cents a share.

Investors had the President’s Day holiday on Monday to mull the news but were still unhappy on Tuesday and sent the price down another $3.35 to $99.54.

IBM’s chief financial officer, John Joyce, immediately responded to say the company would start disclosing more details about such transactions.

Joyce said the disclosures will be included in IBM’s annual report to the Securities and Exchange Commission, which is due to be filed next month.

The company’s financial disclosure changes will include releasing information on intellectual-property income, the impact of gains and losses from its investments in other companies, gains on sales of real estate, the effect of amortisation of goodwill from acquisitions and the impact of income from IBM’s overfunded pension plan.

IBM, the latest company to respond to increased investor concern with accounting practices in the wake of the collapse of Enron, has been criticised for using income from such items as sales of intellectual property and pension-fund gains to reduce its reported costs.

Merrill Lynch analyst Steven Milunovich said he believed IBM’s treatment of the income was consistent with its past practice. But he also said: ‘The company could have done more to call out the magnitude of the transaction.’