In a conference call with financial analysts Wednesday, Microsoft CFO Greg Maffei confirmed that the U.S. Securities and Exchange Commission (SEC) are investigating the company for questionable accounting tactics. Microsoft has an interesting, if dubious, "cookie jar" accounting scheme where profits from successful quarters aren't reported so that less successful quarters can be padded. This creates a false growth curve that is smooth and steady, not the typical up and down earnings you'd expect from a company that relies on periodic product rollouts. Microsoft began the practice with the release of Windows 95 and it currently has over $4 billion in "unearned revenue" sitting on the books.
Microsoft says a January article in the Wall Street Journal, which featured an interview with a former Microsoft employee who described the practice, tipped off the SEC but that its accounting is perfectly legal.
"We don't know the entire scope \[of the investigation\] other than it relates to reserves and reserve policies," said Maffei. He noted that Microsoft is cooperating fully with the SEC and is changing its accounting practices to recognize profits from Windows and Office up front, rather than spread those profits over future quarters