More stock probes shake industry

Accounting woes may be harming companies' images

Novell has added itself to the long list of IT companies investigating their previous accounting practices. Some experts believe that the trend could affect customers as suppliers get distracted by such probes.

Novell said it would conduct an internal investigation, possibly necessitating a delayed filing for the financial quarter. The company said it is taking this action “in light of news about the stock-option practices of numerous companies across several industries”.

Over the past several months, dozens of firms have said they will reassess financials relating to backdated stock options granted to employees. Some, like Novell, have undertaken the reviews voluntarily while others have been prompted by US regulator the Securities and Exchange Commission (SEC).

The backdating of stock options to ensure gains is not in itself illegal. The main thrust of the SEC’s probes is to find out whether firms awarded these benefits without properly disclosing information. Faced with the threat of an SEC probe, many firms are auditing themselves and discovering irregularities.

High-profile cases include IT governance software vendor Mercury, which saw leading executives depart and its stock price fall before selling out to HP. In another case, the FBI is treating the former chief executive of communications software firm Comverse as a fugitive after he failed to attend a recent US hearing.

Gregory Reyes, the former chief executive of network equipment giant Brocade, last week pleaded not guilty to charges of fraud in what is expected to be a test case.

Apple last month said it is likely to restate accounts dating back several years. Some of the investigations relate to payments to its chief executive, Steve Jobs. Computer Associates, now rebranded as CA, has seen its stock price come under pressure after various accounting issues made headlines.

Other technology companies re-examining the issue of stock grants include performance optimisation software firm Quest Software, security giant McAfee, and graphics chip maker NVidia.

However, investigations into stock backdating incidents rarely seem to have a catastrophic effect on market values. Forbes.com recently reported that the companies affected had seen stock falls of less than nine percent on average, compared with a stock value decline of 10.7 percent on average for firms on the technology-heavy Nasdaq marketplace since May.

Some have seen values fall more sharply, including security firms Blue Coat Systems and VeriSign, Forbes noted, but most of these have been component-level firms such as memory chip vendor Rambus.

Some firms have also publicly stated that they risk losing Nasdaq market status and many watchers suggest that mounting pressure could lead to more executive exits, loss of focus and an impact on financials that could alter strategic directions. “It’s a challenge to work through when everybody is talking about this stuff,” said a former executive of a firm that suffered an accounting fraud scandal. “It makes it hard to keep your eye on the ball.”

Industry veteran Vinnie Mirchandani, who blogs about IT deals, said the stock-option scandals could have an effect on buyers “if it affects viability or distracts executives”.