1. Explain the accounting issues involved in each of the seven items in the consent decree between the SEC and Microsoft. As part of your explanation, explain why it was or was not valid to record an accrual, allowance, or liability at the operating level for each of the seven items.
2. What, if anything, could have been done to prevent the alleged accounting errors at the corporate level?
3. Be prepared to record a journal entry for each of the seven items.
4. Did the adjustments at the corporate level harm investors, help investors, or have little effect on investors? Explain in detail.
5. Explain unearned revenues. Why did the SEC not include them in its consent decree?
In the spring of 1995, Microsoft’s chief of internal audits, Charles Pancerzewski, reported suspicious accounting entries to his two direct supervisors, CFO Mike Brown and COO Bob Herbold. Soon afterward, Mr. Pancerzewski, who had previously received stellar performance reviews, received an unsatisfactory performance review and was forced to resign from the firm. In 1996, Mr. Pancerzewski filed a wrongful termination lawsuit claiming he was terminated because he reported questionable accounting practices to his superiors. His lawsuit mentioned that Microsoft illegally set aside accounting reserves during highly profitable quarters and then reduced those reserves during less profitable quarters. The Seattle Weekly reported that in the fall of 1998, U. S. District Judge Carolyn Dimmick denied Microsoft’s final plea for a summary judgment in Mr. Pancerzewski’s lawsuit, finding credible evidence that Microsoft may have violated SEC rules as Pancerzewski alleged. Shortly thereafter, Microsoft and Pancerzewski settled out of court under terms that were sealed by court order but that may have been for $ 4 million.3 The Seattle Weekly article included the following quote from an alleged e- mail that Mr. Brown sent to Mr. Pancerzewski: