International Business Machines Corporation (IBM) has been on the hot seat for a while now. First was the dispute with Amazon over the US Central Intelligence Agency’s (CIA) $600 million cloud service agreement, and now the issue about the US Securities and Exchange Commission’s (SEC) probe of its accounting and financial declarations.
The SEC investigation began last May, when the agency learned that there could be some questionable declarations to IBMs cloud offsite revenue reports. As of this writing, IBM stands by its current financial reports saying its people are doing the correct accounting methods.
IBM stated that it logs its revenues from its cloud services in widely acceptable accounting rules and terms. It would be recalled that IBM is among the top service providers for cloud services like huge company data storage system and remote software applications in the last few years.
Ed Barbini, IBMs vice president for external relations in New York said, “IBM’s reporting of cloud revenue is the result of a rigorous and disciplined process, and we are confident that the information we have provided has been consistently accurate.”
Management professor, Michael Cusmano of the Massachusetts Institute of Technology’s Sloan School of Management said, “This is a murky area where the rules aren’t really established. Companies treat cloud-computing revenue in different ways.”
It’s not just IBM, but about 50% of cloud software companies have issues about misclassification of product returns and service revenues since the 1990s. There were cases when providers classified technical support as revenue for product license instead of an ongoing service payment.
Although IBM did not provide any details of SECs requirements, there are rumors that say its cloud service revenues rose by 70% only in the first 2 quarters of 2013. Records state that IBM continued to beat the projections of financial analysts in 32 of the past 33 quarterly reports by Bloomberg. The same records, however, showed that IBM has failed on 7 out of the past 8 quarters of sales projections.
The IBM probe is just the beginning as SEC rolls more investigation into other cloud provider companies’ financial reports. SEC investigation came out only days after IBM obtained court support over a $10 million case settlement with the former over the bribery case it filed in South Korea and China. This year, IBM still faces more bribery cases in the U.S. Justice Department as the investigation of its contracts with Ukraine, Poland, Bangladesh and Argentina rolls out.
As a result of the controversies IBM has caught itself into; some of its existing government agreements are hugely affected. For one, the Australian State of Queensland has declared that it will not renew its future work with IBM, not “until it improves its governance and contracting practices.” Queensland became sullen as it learned about IBMs role in a billion-dollar payroll scandal that involved its health department agency.
Campbell Kevin Thomas Newman, Premier of Queensland, however, said “Reports that suggest that IBM is accountable for the $1.2 billion costs to remedy the Queensland Health payroll system are completely incorrect. IBM’s fees of $25.7 million accounted for less than 2 percent of the total amount. The balance of costs is made up of work streams which were never part of IBM’s scope.”
Another IBM service contract that will not be renewed is the one with the State of Pennsylvania. The state said IBM had a 42-month delay in work and had a $60 million over budget.
Department of Labor and Industry Secretary Julia Hearthway said, “The bottom line is that the problems we’ve identified cannot be solved and we will not renew our contract with IBM. The level of risk, combined with the critical nature of the system, demands that the Department of Labor & Industry has a system that produces timely decisions reliably and accurately.”