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SEC, Software Firm Settle Accounting Charges

Had i2 Technologies reported correct financials, they would have been increasingly negative.
Stephen TaubJune 11, 2004

Software maker i2 Technologies Inc. agreed to pay $10 million to settle Securities and Exchange Commission charges. Over a nearly five-year period ending in 2002, the company allegedly misstated about $1 billion of license revenues, including over $125 million it should never have recognized.

Had the Dallas-based developer and marketer of enterprise supply chain software provided accurate financial reports during these periods, it would have disclosed increasingly negative results, the commission asserted.

The company settled by consenting to a cease-and-desist order finding that it violated the antifraud, internal controls, record-keeping, and reporting provisions of the federal securities laws and to pay the penalty in a related civil action filed in U.S. District Court, according to the SEC.

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The entire penalty proceeds will be distributed to injured i2 shareholders. The SEC added that i2 has agreed to continue cooperating with the investigation. The company settled without admitting or denying the regulator’s substantive findings against it.

The company’s revenue-recognition miscues “were endemic and were triggered in certain instances to meet analysts’ revenue and earnings expectations,” said Harold Degenhardt, Administrator of the SEC’s Fort Worth, Texas office.

According to the SEC, i2 favored up-front recognition of software license revenue, which is accepted under generally accepted accounting principals (GAAP). However, i2 knew or should have known that immediate recognition of revenue was unsuitable for a number of i2’s software licenses because they required long and involved implementation and customer customization, the commission added.

In some cases, i2 shipped certain products and product lines unfit for commercial use by a broad range of users, it explained. At other times, i2 licensed software that needed added features to be useful to particular customers, it added.

On still other occasions, i2 exaggerated certain product capabilities or entered into side agreements with customers that were not properly accounted for, the SEC charged.

Melanie Ofenloch, a company spokesperson told Reuters that i2 executives were “pleased to have concluded the investigation.” The $10-million fine won’t affect the i2’s financials, since the company had already accrued for it earlier this year in expectation of the settlement, she reportedly said.