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Chapter 8. Earnings Tricks and Games: Ma... > Red Flag 2: The Use of One-Time Gain...

Red Flag 2: The Use of One-Time Gains from Asset Sales to Reach Earnings Targets

International Business Machines Corp. (IBM) said that it had cut selling, general and administrative expenses, the main expenses line in its accounts, in the fourth quarter of 2001. The reduction by 3.8 percent to $4.18 billion made it look as if the company really had a handle on costs despite sagging revenues, and it helped it to beat Wall Street’s earnings expectations by a penny. It seemed that the company had managed to squeeze out costs from an area that includes everything from headquarters staff salaries to office supplies to travel expenses. However, what IBM didn’t tell investors in the press release announcing the results in January 2002 was that the expense reduction was helped by a $280 million gain on the sale of an optical transceiver business to JDS Uniphase that was included in the expenses calculation but not separately disclosed in the press release. The company only acknowledged the way the gain was booked when The New York Times ran a story about it and the company’s shares dropped.


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