Rumor SEC recently investigated cooked books at Cisco
"They were booking it as current quarter revenue and keeping track of it manually on the back end. Often times in order to let the customer use the money, it came out as Zero Dollar orders from new orders, so in essence they were keeping two sets of books and were violating Sarbanes Oxley."
Well, I received the following private email message:
Love your work exposing the folks who have been ruining a once great company.
The SEC has been inquiring about potentially unscrupulous business practices that may have inflated Cisco's earnings by hundreds of millions of dollars over the years.
The scheme goes like this:
Have Enterprise Reps on the Largest Accounts in the country sign Strategic Letter Agreements with their clients that promise in return for certain volumes of purchases, Cisco will lock in discounts and set aside a percentage off of list to an Innovation Fund that can be used by the customer to purchase additional Cisco HW, SW or Services.
The catch, orders booked on these deals were not settting aside the 2,4, 6 and sometimes 8% of list price as deferred revenue.
They were booking it as current quarter revenue and keeping track of it manually on the back end.
Often times in order to let the customer use the money, it came out as Zero Dollar orders from new orders, so in essence they were keeping two sets of books and were violating Sarbanes Oxley.
In addition, if they did have the money set aside (which in some rare cases they did), when the money was used for purchases, the customer did not pay any taxes. So clearly there are tax implications as well.
Evidently the SEC's inquiry led to an internal audit to "discover" these innovation funds and PWC recommended that their existence be banned as there was little to no oversight of the funds which could have caused mistated revenues.
Ironically, the SEC had the tiger by the tail but it would seem that they decided to use the information differently.
At the same time the investigation was occurring, John Chambers was out rallying the masses for an international tax holiday to repatriate foreign profits.
He went on 60 minutes:
He griped about it whenever he could and then he went quiet.
No mention of it since then.
Perhaps instead of fining Cisco and forcing them to restate their earnings for the last 4 years, the SEC decided to use the information to get Dandy John to quiet down on the repatriation issue.
It begs the question, if the SEC has enough information to ask the right questions and to get an Internal Audit done, how come they won't fine the violator and send an example to Wall Street to keep your books clean?