The Securities and Exchange Commission is investigating the accounting practices of data mining software vendor MicroStrategy, as well as the company's relationship with its auditor, PricewaterhouseCoopers.
The SEC is trying to determine whether MicroStrategy Inc., Vienna, VA, prematurely booked revenue in order to report profits rather than losses, and if MicroStrategy's relationship with its auditor, PricewaterhouseCoopers LLP, New York, may have influenced its audit partners' approval of possible overly aggressive accounting.
The agency is looking into whether MicroStrategy's audit partners encouraged the company to ask its customers and joint-venture partners to hire PricewaterhouseCoopers' consulting arm. The SEC is also gathering information on MicroStrategy's audit partners receiving incentive compensation for cross-selling consulting services, and whether such a system could cause a breach of auditor-independence standards.
Pricewaterhouse took over as MicroStrategy's auditor in July 1998 after merging with Coopers & Lybrand, MicroStrategy's original auditor. Before the merger, the former Pricewaterhouse had close ties with MicroStrategy, serving as a reseller of software and as a partner in working on software systems. PricewaterhouseCoopers canceled formal partnerships after the merger, but the companies still work together on an ad hoc basis.
The SEC is concerned that audits may be tainted because an accounting firm both audited a company's books and supplied consulting services. Therefore, it is investigating the company to showcase the need for new auditor-independence standards. The SEC proposed rules June 27 to significantly limit the consulting services that auditors could offer corporate clients, in an effort to protect auditors from possible conflicts of interest that could undermine the credibility of financial reports.
The SEC reportedly sent at least 20 subpoenas in late March and early April to MicroStrategy, several of its customers and its auditor, requesting information such as the company's restatement of revenues and profits for the past three years. In June, SEC enforcement staffers interviewed representatives of several MicroStrategy customers.
Among MicroStrategy's customers that were asked to supply documents and information are Ameritrade Holding Corp., Omaha, NE; Xchange Applications Inc., Boston; and NCR Corp., Dayton, OH.
Last October, NCR and MicroStrategy signed a $52.5 million licensing and technology agreement that includes an investment by both companies in technology infrastructure, integration and marketing. In January, Xchange signed a multiyear, $65 million software licensing and technology agreement.
MicroStrategy spokesman Michael Quint said the company “occasionally” recommends PricewaterhouseCoopers' consulting unit to customers, and that audit partners didn't solicit business from MicroStrategy customers. He also said that MicroStrategy “is cooperating fully with the SEC investigation.”
The enforcement staff is reviewing the information to decide whether to allege violations against MicroStrategy and PricewaterhouseCoopers.
MicroStrategy was featured last November in a “60 Minutes” segment about online data collection and profiling, and how Internet marketers use cookies and other Web browser-based technology to target consumers with advertising.
