The chief accountant for the Securities and Exchange Commission didn't come to the Goldman Sachs Technology Investment Symposium to bury the in-process research-and-development write-offs. But after listening to Lynn Turner, many in the audience may have been tempted to hire a funeral band for the popular accounting practice.
Turner kicked off the proceedings by explaining how the SEC started investigating huge in-process research-and-development (IPRD) charges that technology companies are taking whenever they acquire a company. Since the mid-1970s, companies acquiring other companies have been allowed to write off the value of unusable research development in the acquired operation. But this process has gained huge popularity in the 1990s, especially with technology companies.
Certainly, there are advantages: By writing off a great deal of a company's purchase price in a one-time charge, an acquiring company can later report higher earnings, earnings per share, return on assets and return on equity.
But starting with an investigation in spring 1998, the SEC staff identified problems with the practice, basically that many of the valuations of IPRD "simply were not grounded in basic business sense," Turner said.
Turner complained that companies didn't differentiate between a project that was in the conception stage and one that was near completion. "In 1998, $16 billion were written off as in-process R&D," Turner said.
The most worrisome part, though, was that companies were not properly valuing the IPRD, and in some cases, they were telling their boards of directors one figure for the write-offs and putting other figures in financial statements.
Turner's views did not go unchallenged. In the question-and-answer session,
CFO Jeff Henley gave a passionate five-minute speech about how the inquiries were causing confusion in the industry. He admitted that his company had received one of the SEC's comment letters but insisted that he was not speaking on behalf of Oracle because his company's books were clean.
"Why do it?" Henley asked, noting that the biotech industry has been aggressively writing off IPRD for years. He also said, "We rely on the big six
accounting firms to tell us what to do, and from what I can tell, you're changing the rules" about what can be written off and what can't.
Turner agreed that the restatement of earnings was causing confusion, but the inquiries would continue. Looks like some long, grim nights ahead for analysts and fund managers. Sharpen your pencils.
eBay Offers More Services
is an auction site? Think again. To get an idea of where the company is headed, pay attention to CEO Meg Whitman in her presentation Wednesday: eBay is the "world's largest person-to-person online trading community."
The difference between an auction site and a trading community site? Well, Whitman explained, the company doesn't believe that the auction is the only format that will work in person-to-person commerce. She told the audience to be ready for fixed-price sales areas, but not immediately. "It is not in the near term," she said, "and in the Internet world, near term is three months."
Get ready for eBay to expand into other nonauction activities, Whitman suggested -- services such as shipping, insurance, payment, packing and customs-clearing.
To address concerns about fraud, the company will start a "verified user" program, in which people can agree to have their own personal information, like Social Security number and driver's license, checked by a credit-reporting bureau. Reported fraud on the service has stayed constant at about 27 for every million transactions, Whitman said. But the company has instituted various measures against fraud and use of the service to sell possibly illegal goods. "While this was not a significant problem, we were starting to see momentum in the press about this," she said.
Inktomi Aims High
CEO David Peterschmidt couldn't have been clearer in his Wednesday presentation. Maybe you think
is synonymous with the Internet; maybe you think
is synonymous with it. Peterschmidt's goal is obviously to make you think of Inktomi as the stock in your portfolio that's indexed to the Internet's growth.
"This will become one of the defining software architectures of the Internet," Peterschmidt said. "We're the infrastructure guys."
Long thought of as only a search engine company, Inktomi wants to use its proprietary technology to improve the efficiency of networks. One area of growth: video caching, which makes it possible for greater numbers of people to watch the same video stream simultaneously during Web broadcasts. Many people complained that they could not log on to watch the
live underwear fashion show. Not so with Inktomi technology, according to Peterschmidt. "If this had been running on this architecture, you would not have seen this happen," he said.