SEC Keeping Eye on Write-Downs

The Securities and Exchange Commission is closely following a flood of inventory write-downs by technology companies out of concern that the practice may mislead investors.

At issue is whether the write-downs, which companies are supposed to record when inventory is obsolete or devalued, are being used for material that will have value if business picks up.

“My concern is that people are taking write-downs now and maybe later anticipating selling this [inventory] at a profit,” said Lynn Turner, the SEC’s chief accountant.

Turner stopped short of saying the SEC would launch an inquiry into the write-downs. Though he declined to comment on specific companies, those taking write-downs include Cisco Systems (CSCO), which plans a $2.5-billion charge in its fiscal quarter that ended Friday.

The question is whether some of these write-downs will greatly reduce the value of the inventory on the companies’ books--with the profit recorded later if demand rebounds.

The companies also can leave the charges out of the pro forma financial statements they issue in the form of news releases. The pro forma format, which isn’t governed by accounting rules, enables companies to exclude expenses that must be reported in regulatory filings, analysts said. That means in addition to a future profit that may appear artificially large, the initial cost appears artificially small.

Cisco spokesman Kent Jenkins said the company has done nothing unusual this year.

“The only thing that has changed this quarter is a very significant change in demand for some of our products,” he said.

That drop in demand comes on the heels of the company’s efforts last year to build inventory to address a parts shortage, he said.

“This is something that does come up in business downturns,” said Robert Willens, an accounting and tax specialist at brokerage Lehman Bros.