For A Few More Dollars: IBM’s Leasing Adventure

Yesterday, the SEC settled charges with International Business Machines (IBM) for a sham transaction conducted with Dollar General Corp. (DG) in 1999 and 2000. It’s a good reminder of the Wild, Wild 1990’s because it contains many ingredients of the accounting games of those days: pay incentives that could be gamed through accounting manipulation, loans disguised as revenues, side agreements and avoidance of writedowns.

Where to begin? The SEC’s complaint in the matter would help. It seems that in 1999, an enterprising IBM executive by the name of Kevin Collins persuaded Dollar General to lease new cash registers from IBM for $10 million over a few years. Not good enough: he wanted to accelerate the transaction through the end of 2000 - when it would have a favorable effect on IBM revenues AND his bonus. Dollar General balked because the acceleration of the register rollout would force them to write down the existing registers and take a charge. This became known as their “book value” problem.

Collins hatched a plan for IBM to “buy” the cash registers back from Dollar General, and work the buyback price into the contract for the new registers, effectively doubling the price of the new computers from $10 million to $20.5 million. Given that there was no real purchase of the old registers and no intent to do anything with them after the “purchase,” the incremental dollars in the lease contract were really a loan, not revenue. IBM presented the transactions properly in their financials, but certain individuals benefited from having their bonuses calculated on the higher figure. One of them was Collins: 50% of his bonus was attributable to the Dollar General gig. As for Dollar General, the transaction enabled them to report pretax income 6.5% higher than it should have been stated.

In the end, Collins agreed to the entry of a final judgment permanently enjoining him from “aiding and abetting violations” like these, and subject to court approval, will pay $95,000 in fines, interest and penalties.

How about IBM? In a separate proceeding, they were found to have kept inaccurate books and records of their own - for more than just the Dollar General transaction. According to the administrative proceeding, “in the United States, and at least 23 other countries, IBM made at least $200 million in revenue recognition errors in its fiscal year 2000, and at least $377 million in revenue recognition errors in its fiscal year 2001. At least $281 million of this revenue involved the use of side letters, a substantial portion of which were side letters in which IBM granted rights of return.”

Pretty unnerving stuff. Many of the errors related to recognition between quarters and were corrected before the SEC investigation of the Dollar General deals. No real punishment meted out to IBM for this, just the usual “cease-and-desist” action.