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    Highlights for week ending June 7, 2003
  • Reuters: IBM Says SEC Probing Its Accounting. Excerpt: IBM's accounting has come under scrutiny over the years, with investors criticizing the company for its lack of disclosure. Last year, IBM addressed some of those issues by increasing the amount of information it provided. But some investors have continued to say the company has not abandoned the earnings-management habits that enabled it to produce quarter after quarter of steady earnings growth under former Chief Executive Louis Gerstner through such methods as share buybacks. James Grant, publisher of Grant's Interest Rate Observer and a longtime critic of Big Blue, said he had not pored over IBM's books recently, but he found IBM's accounting aggressive when he started focusing on the company in the late 1990s. "We found it aggressive and promotional and questionable, and I think it's appropriate that the SEC should be looking into it," Grant said.


  • Wall Street Journal: Unions, States Seek to Block Outsourcing of Jobs Overseas. Excerpt: Legislation aimed at keeping jobs in the U.S. is pending in at least five states -- New Jersey, Connecticut, Maryland, Missouri and Washington. The bills employ a variety of methods, including blocking companies from using foreign workers on state contracts and requiring foreign call-center employees to identify where they are located. On Capitol Hill, the AFL-CIO and one of its members, the Communications Workers of America, are urging members of Congress to direct the General Accounting Office to study the trend's U.S. economic impact. ... The bills have prompted India's National Association of Software and Service Companies, a New Delhi trade group representing 850 international companies, to hire Hill & Knowlton, an influential lobbying firm, to represent its interests in Congress and the state houses. The firm worked to water down the New Jersey bill, sending the trade organization's vice president, Sunil Mehta, to meet personally with state lawmakers, people familiar with the situation say. If the bill gets to the Assembly floor before lawmakers adjourn at the end of June, it likely will include new compromise language that will provide exceptions for foreign outsourcing of jobs. Hill & Knowlton and the Indian trade group declined to comment.


  • CBS MarketWatch: FASB chief sees 'dangerous precedent' in legislation. Excerpts: The nation's chief of accounting standards attacked proposed legislation Tuesday that would impose a three-year moratorium on any plans to expense stock options, saying intervention "would be in direct conflict with the expressed needs and demands of investors." "The moratorium would establish a potentially dangerous precedent," Robert Herz, chairman of the Financial Accounting Standards Board, testified before a House panel. "It would send a clear and unmistakable signal that Congress is willing to intervene in the independent and open accounting standard-setting process based on factors other than the pursuit of sound and fair financial reporting," Herz added.


  • New York Times; S.E.C. Asks I.B.M. for Information. Excerpt: I.B.M. said yesterday that the Securities and Exchange Commission was investigating how the company accounted for revenue in certain customer transactions in 2000 and 2001. In a brief statement, the company added that the inquiry was related to a separate S.E.C. investigation of a customer of the company's Retail Store Solutions unit, which sells computerized, point-of-sale cash registers and other products. I.B.M. did not name the customer. ... In 2000, I.B.M. agreed to pay $300,000 to settle a regulatory complaint brought by the S.E.C. The case focused on allegations that some I.B.M. officials paid bribes in Argentina to win government contracts. The S.E.C. had charged that I.B.M. filed misleading financial reports in 1994 and 1995 that failed to reflect the suspected bribery payments. I.B.M. neither admitted nor denied wrongdoing under the settlement.


  • TheStreet.com: SEC's Formal IBM Probe Doesn't Mean Black Tie. Full excerpt: IBM's trying to make molehill out of this Securities and Exchange Commission mountain. And the company just may get away with it. As is so often the case, the journalists writing about this story are completely missing the notion of "formal." If you have a formal investigation, that means that the company isn't playing ball and is fighting the probe tooth and nail. It means that the investigation is broad-based and may be all-encompassing. It means, in a word, trouble. But IBM is brilliantly trying to spin the investigation to say that it involves some customer issue, like it's a one-off deal. And the formal part? They are making it seem like that means black tie, not business casual.


  • Motley Fool: Big Blue's Accounting Clues. Full excerpt: Shares of IBM were off a bit today after the company revealed the SEC has launched a formal probe into its revenue recognition practices for 2000 and 2001. Management says it's currently a "fact-finding investigation" that it believes arose from a separate probe into a customer of IBM's Retail Store Solutions unit. This is far from the first time Big Blue has had to answer for questionable accounting practices. As Whitney Tilson detailed over a year ago in IBM's Accounting Tricks, the company has engaged in aggressive bookkeeping practices since at least 1999. The list includes:
    • Overly aggressive pension-fund accounting.
    • Using one-time gains to offset one-time charges.
    • Using proceeds from the sale of a business to lower its operating costs, rather than accounting for it as a nonrecurring one-time gain.

    Sometimes such tactics are legitimate, but the point is the company engages in aggressive rather than conservative accounting and its methods are hard to follow. This is not the way to do things in a post-Enron world. The issue comes up again and again. Now there's another SEC probe. Just how much can we trust revenue and earnings figures? When will it all end? How will it all end? Whitney predicted last year that the creative accounting would come back to haunt Big Blue and that the stock price would suffer as a result. Shares are down about 15% since then, roughly matching the S&P 500. Stay tuned.

  • CNN/Money: IBM has the Big Blues. Excerpt: IBM's accounting has been a frequent target of criticism during the past few years and this investigation could reopen some ugly wounds. In 2000, the SEC asked IBM to amend its 1999 annual report due to concerns about how IBM was accounting for gains from its pension fund and asset sales. The matter was resolved without IBM restating numbers. Last year, following criticism of how IBM disclosed an asset sale to JDS Uniphase, the SEC launched a preliminary investigation of IBM's accounting but took no action. And skeptics have long maintained that IBM's aggressive use of share buybacks and other accounting maneuvers, albeit legal, have helped the company hit earnings targets during tough times.


  • Forbes: Accounting Gumshoes. Excerpt: Practically every month, we seem to be treated to another tale of accounting malfeasance. First there was the Enron debacle which brought down the merchant energy sector. Then Tyco International and HealthSouth. Now mighty IBM is facing an SEC probe because of questions about the way it recognized some revenue three years ago. There is a chance that the investigation will turn up nothing, but it also could discover that Big Blue has been playing accounting games and essentially misleading its investors.


  • Boston Globe: Pension pain. Relief bill for companies would cut employee payouts. Excerpt: A little-noted side effect of the proposal would reduce payments to employees covered by traditional, defined-benefit pension plans who opt to take a lump sum when they leave their employers. Defined-benefit plans cover about 23 million American workers, and at least half of them allow them to take a lump sum option immediately, rather than receive a monthly pension check later. ''We're talking about an act of Congress that could dramatically reduce your pension benefit 10 percent, 20 percent or more,'' said David Certner, director of federal affairs for AARP, a lobbying group for older Americans. ''This is a huge, explosive issue - billions of dollars we're talking about, not just this year but forever.''


  • Janet Krueger CALL TO ACTION: Free Trade Agreements. Excerpt: People on this board have grumbled off and on about the number of H1B Visa holders who seem to be displacing older American workers. There has also been some discussion about L1 Visas being used to get around the controls on H1B Visas. In case you're wondering, things are likely to get worse before they get better. The recently negotiated free trade agreements with Singapore and Chile have been enhanced with a few sentences to allow the free trade of PEOPLE in addition to goods and services. This means companies who wish to save money will no longer have to skirt around the controls included in the H1B and L1 Visa laws. Granted, some of those protections weren't being enforced very rigorously, but they did at least exist, for those who were willing to go to the Department of Labor and insist on enforcement.


  • CIO.com: Should We Put a Cap on the Number of L-1 Visas? Excerpts: In some ways, the L-1 visas are more threatening to U.S. workers than the H-1Bs are. Unlike H-1Bs, L-1s do not require that workers be paid in accordance with the prevailing wage, which means that foreign workers coming here under the protection of L-1s offer greater savings to employers. And unlike workers with H-1Bs, workers with L-1s don’t have to pay a $1,000 fee that goes toward the training of American workers. Perhaps most troubling, the government has not capped the number of L-1 visas issued. And that number is growing. In 1999, the government issued 41,739 L-1s. Last year, it issued 57,700. ... According to a recent story in The San Francisco Chronicle, it is becoming standard operating procedure for an Indian outsourcing firm to take over a project for an American client, send in a team of visa holders to learn the company’s procedures, and transfer much of the work back to India. But even if the work remains in this country, observers point out, it is assigned to L-1 workers, who often replace higher-paid American workers.


  • Wired News: Jobs Squeeze for Indian Workers. Excerpts: U.S. companies such as IBM, Intel, Hewlett-Packard, Oracle and PeopleSoft are already exploring countries with even cheaper sources of technical labor, says a report from research firm IDC. The new destinations include Romania, Russia, Hungary, the Czech Republic, the Philippines, Singapore, Thailand and Vietnam. As a result, India, which some have blamed for the loss of American jobs, may soon lose jobs itself. ... Hungary, Russia, Romania, and the Czech Republic have begun to obtain more outsourcing contacts from U.S. firms like IBM, Boeing and Intel. But most of the workers in these countries are more apt to be doing software testing and development than technical support, said Traci Gere, Group Vice President at IDC. According to Gere's research, the Philippines is strong in "call centers and sweatshops" but is a challenge due to the country's political instability. ...

    That keenness is a concern to Padmajai Goenka, a 23-year-old technical support worker in Mumbai, India, who goes by the name of Pam when she's on duty troubleshooting problems for puzzled PC users in the United States who very rarely know they are speaking to someone who lives thousands of miles away. Goenka, who requested her company name be withheld, said that she was trained to "act American." "Even though there is a lot of yelling from the clients, I love this job." Goenka said. "I have been fascinated with America since I was a little girl. Now I get paid to pretend I am American -- it's wonderful." ... Instead, instruction is centered on learning American culture, and "losing the British accents they all pick up in school," Gupta, who has an office in Jackson Heights, Queens, said. Trainees typically watch dozens of American movies and TV shows for the first week to acclimatize themselves to U.S. slang and accents.

  • NewsForge: The Impact of the Offshore Services Phenomenon. Excerpts: A Global Perspective. Excerpt: In a teleconference held June 5, 2003, IDC analysts said they expect global outsourcing in the IT industry to increase, which will put smiles on the faces of workers in China, The Philippines, India, Vietnam, and Eastern Europe, but will continue to depress U.S. and Western European IT workers. Except the French. The presentation pointed out that the trend of moving as much work as possible to countries with the lowest wages is not new. In the case of the U.S., it started with apparel and electronics manufacturing in the 1960s, and the offshore trend in those industries has been so complete, said one IDC person, that today "there is not one TV manufactured in the U.S." Now IT hardware development and manufacturing, software development, business process functions (like HR and customer service), and IT services, including infrastructure monitoring and management, are leaving high-wage countries.


  • Business Week: India: A Tempest Over Tech Outsourcing. American legislators are accusing India of stealing tech jobs. Excerpts: It has been a rough few months for India's IT-services companies. With a slow global economy and increasing competition from multinationals on their own turf, their profit margins have been sliding. So the last thing they need is a trade spat with the U.S. But that's just what they're getting. Alarmed by the loss of jobs to foreigners, American lawmakers are trying to limit the outsourcing of tech services and other white-collar work abroad. Says a top IT executive in Bangalore: "When bad news starts coming, it comes in truckloads." The U.S. accounts for 70% of India's software services exports. The momentum against the export of white-collar U.S. jobs has been building for months. Congress in early June began considering bills to close an immigration-law loophole where foreigners can service U.S. clients using guest worker visas. Representative Nancy L. Johnson (R-Conn.) has asked that large insurance companies disclose how much of their IT work is being done by foreign workers in the U.S. At the state level, legislatures in Maryland, Washington, Connecticut, Missouri, and New Jersey are considering laws banning outsourcing of government tech-services contracts to low-wage developing countries. Even if they don't pass, though, they might make a U.S. company think twice before outsourcing more work to India and elsewhere.


  • San Jose Mercury News: Historic IBM research building threatened by development. Excerpt: Almost a half-century ago, Building 25 on IBM's sprawling campus in South San Jose was the embodiment of high-tech progress -- an airy, sunlit office that was the home for some of the corporation's most innovative researchers. Today, progress is knocking on the door of Building 25 again, this time in the guise of a bulldozer. The single-story modern industrial structure -- the birthplace of the flying head disk drive and a Cold War tour stop for Nikita Khrushchev -- now stands in the way of a proposed Lowe's Home Improvement Warehouse. ... What commissioners saw Wednesday was a dilapidated edifice: 6-foot weeds sprouting in the once pristine courtyards; ceilings dotted with holes; fluttering cobwebs clinging to door frames; and a fallen section of tile fascia resting precariously on an awning. Advanced Research Building 25 didn't look that way in 1957 when IBM moved some of its best researchers into the paneled offices. It was a place calculated to inspire thinking and harmony. According to some observers, the building achieved those goals.
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