IBM agreed to pay $7 million to settle a Securities and Exchange Commission investigation related to alleged accounting fraud at Dollar General, a customer of the computer giant. In a separate case, IBM also settled its own books and records violations charges.
In addition, Kevin B. Collins, an IBM employee, settled charges of aiding and abetting Dollar General’s fraud through a sham transaction that was designed to achieve a particular accounting result for discount retail chain.
Without admitting or denying any wrongdoing, IBM agreed to an SEC administration order to cease and desist from committing or violating certain federal securities laws. IBM officials emphasized that the company will not restate any of its prior results due to the settlement.
According to the SEC’s complaint, in 1999, IBM and Dollar General agreed that the retail chain would lease new electronic cash registers from IBM to replace old registers. Under the plan, Dollar General would phase out the old registers and purchase new IBM equipment over a multi-year period.
The Commission alleges that in the second half of 2000, IBM, through Collins, instead suggested that Dollar General accelerate the roll-out of new IBM equipment by leasing all of the new equipment by the end of 2000 for a total of about $10 million. The lease payment would have increased IBM’s revenue for fiscal year 2000, as well as Collins’ bonus compensation for that period.
The Commission noted that Dollar General initially rejected the leasing proposal because of the lease accounting treatment. The SEC explained that if Dollar General replaced all of the old registers, it would be required to write-off the book value of the equipment as an expense. The “book loss”, in turn, would have a negative impact on Dollar General’s earnings for its fiscal year 2000, noted the regulator.
So, Collins devised a way to solve Dollar Generals book loss problem, proposing that IBM purchase Dollar General’s old registers for about $11 million, said the SEC. By selling the equipment at that price, Dollar General would avoid most of the negative consequences of the write-off, noted the complaint.
However, the SEC charged that the proposed IBM “purchase” was not a bona fide transaction. Among other concerns, Dollar General essentially repaid IBM for buying up the old registers by paying an inflated price for the new equipment. In addition, IBM agreed to buy the old equipment for more than Dollar General was going to pay for new registers, even though IBM and Collins knew that the old registers were worthless to the computer company. Ultimately IBM never took possession of any of the registers, according to the SEC.
Under the settlement deal, Collins was ordered to pay $95,000, including $48,769 in disgorgement, $21,231 in prejudgment interest and a civil penalty of $25,000.
In another administrative proceeding, the SEC found that IBM maintained inaccurate books and records during 2000 and 2001 as a result of several discrete revenue recognition errors that took place in the United States and at least 23 other countries, totaling approximately $577 million in revenues over that two-year period. The order also finds that IBM violated certain laws for failing to keep accurate books and records.