IBM To Provide More Details Of Earnings

CNNfn: Markets Impact
Bruce Francis, Kathleen Hays
02/19/2002
(c) Copyright Federal Document Clearing House. All Rights Reserved.

BRUCE FRANCIS, CNNfn ANCHOR, MONEY & MARKET: IBM ( http://www.ibm.com/ ) shares fell more than $3 today, the Dow`s biggest loser. Big Blue says it will provide much more detail about its earnings starting with its 2001 annual report. The news follows requests from analysts and investors.

IBM came under scrutiny after a published report on Friday said the company used a
one-time gain from the sale of a unit to top fourth-quarter earnings estimates.

We're joined now by Edward Ketz, professor of accounting at Penn State University.
Professor Katz, thanks for joining us, we appreciate it.

EDWARD KETZ, ACCOUNTING PROFESSOR, PENNSYLVANIA STATE UNIVERSITY: Well, thank you for the opportunity to talk with you.

FRANCIS: First of all, let's talk about what IBM did wrong, and maybe we have to put that in quotation marks. What -- was IBM's disclosure adequate? If it was legally adequate, was it in the aggregate misleading to investors?

KETZ: The issue comes about because the fourth-quarter earnings were met because IBM had a $300 million gain from the sale of a business to JDS Uniphase ( http://www.jdsunph.com/ ). And the sale prompted two questions. First of all, did IBM structure this deal at the last minute only for the purpose of meeting the forecasted earnings? And number two, given that these types of deals are hard for an analyst and an investor to predict, the issue is whether they are providing enough information to help investors and analysts to be able to understand the earnings and forecast earnings in the future.

KATHLEEN HAYS, ANCHOR, MONEY & MARKETS: Well, Professor Katz, I think one thing that's really interesting about earnings is how companies have learned to meet them within a penny time after time after time, meet the estimates. What does that tell us? I mean, GE is notorious, or praised, for being able to do this over and over and over. Many people think, Well, GE Capital and Jack Welch's ability to take a little bit from plastics and put it over with, you know, washing machines has helped him do that.

Is this a pretty widespread practice?

KETZ: I think it is a widespread practice, and it, one, is focusing too much on short-term earnings. Accounting is simply not precise enough nor accurate enough to be able to come down to earnings within a penny. Earnings in the real world can be off by 5, 10 percent simply because of the estimates that accountants use, and also the accounting principles that they choose.

And so this concern about getting earnings to the precise penny is a bit ridiculous, in my opinion.

FRANCIS: Now, if you felt that what IBM was doing or (UNINTELLIGIBLE) or did, in the example of this sale of the unit to JDS Uniphase, if you felt that that wasn't the best kind of disclosure, it's the kind of disclosure that they're offering now to break it out in the annual report, and perhaps, perhaps put it in the 10Q, is that enough? Is that answering what some investors have had some quibbles with?

KETZ: I think IBM has a very simple solution, simply disclose more. Tell the investors what you're doing, indicate what is going on, and help the investor to understand the transaction. The issue is, is that when you have these one-time charges, it's kind of hard to figure out the predictability. It's hard to figure out what's going to happen in the first quarter, second quarter of the next year.

And analysts are trying to figure that out, they're trying to understand the business IBM...

FRANCIS: But putting that disclosure in the annual report, that's about as posthumous disclosure as you could possibly get, isn't it? I mean, is it, is that, is that timely enough to be useful?

KETZ: Well, they can find other ways of doing it, perhaps getting press releases, perhaps using the Web site, so they can have press releases in other ways.

HAYS: Sir, is this going to cause -- (UNINTELLIGIBLE) seems to expect that this is going to cause us to see lower stock prices because companies aren't going to be as aggressive. And if they're not going to massage the earnings, if they're not going to be so careful with their accounting methods, it seem also we're going to get a lot more volatility in stock prices because no matter what your estimate is, chances are it's going to be way off because we're getting a more accurate depiction of what companies are doing.

KETZ: Well, I would answer that in the following way. I think that the volatility of earnings has actually been depressed over the past several years because firms are choosing methods to make the earnings a smooth flow. In reality, earnings are bouncing up and down, and the volatility has been suppressed.

So if the firms are more accurately presenting the accounting numbers and they're not playing the games that they have been, then we will see increased volatility of earnings. But that's actually a more accurate picture of what's been going on.

HAYS: OK. Thank you very much, Edward Katz, professor...

KETZ: Thank you.

HAYS: ... at Penn State University.

To return to Media Coverage click here .

REPORTERS & EDITORS: For more information, please contact Wyatt DuBois in the Smeal College of Business Media Relations Office at 814-863-3798 or wed112@psu.edu .

Penn State's Smeal College of Business offers highly ranked undergraduate, MBA, executive MBA, Ph.D., and executive education opportunities to more than 5,500 students at all levels. Featuring academic departments of accounting, finance, marketing, insurance and real estate, management, and supply chain and information systems, the college is also home to major research centers such as the Center for Supply Chain Research, the Institute for the Study of Business Markets, the eBusiness Research Center, the Farrell Center for Corporate Innovation and Entrepreneurship, the Center for Global Business Studies, and the Center for the Management of Technological and Organizational Change.

Click here for more news.