Jan. 12 (Bloomberg) -- International Business Machines Corp., the world's biggest computer-services provider, said the U.S. Securities and Exchange Commission escalated a probe into the company's first-quarter earnings report.

The SEC upgraded its investigation into IBM's earnings disclosures to formal from informal, Armonk, New York-based IBM said today in a statement. A formal probe gives the SEC the power to issue subpoenas and compel executives to testify.

The regulator started looking at IBM's reporting last year after an April earnings release that coincided with a change to the company's accounting for stock options. The inquiry, first announced in June, rekindled analysts' concerns that IBM had used the change in stock-option expensing to mask a profit shortfall.

``It's at least got to the level where the SEC believes that there is an issue and it's become more serious,'' said Brad Lewis, a former federal prosecutor and now a partner at Fenwick & West LLP in Mountain View, California. ``Generally it's seen as not good news. It's not that surprising and it doesn't mean that anyone has drawn any conclusions.''

The probe isn't an indication that any violations of law have occurred, IBM said today. SEC spokesman John Heine declined to comment on the investigation. IBM spokesman Ed Barbini declined to comment beyond the statement.

IBM shares fell $1.07 to $82.50 in extended trading after the release. They lost 60 cents to $83.57 in New York Stock Exchange composite trading and are down 12 percent in the past year.

April Report

IBM Chief Financial Officer Mark Loughridge said on April 5 he expected a change in accounting for stock options would cause an expense of 14 cents a share. IBM urged analysts to reduce their profit estimates from an average $1.04 a share to an average 90 cents to reflect the change.

Nine days later, IBM reported profit of 85 cents, missing the estimates, and stock option costs of 10 cents a share.

The lower-than-forecast compensation costs indicated IBM missed estimates by an even wider margin than had been acknowledged, Steve Milunovich, then an analyst at Merrill Lynch & Co., said on April 15.

IBM said sales in the first quarter rose 3.3 percent to $22.9 billion, also lagging behind the $23.7 billion average estimate of 17 analysts in a survey by Thomson Financial.

Shares of IBM fell 8.3 percent on April 15 after the earnings announcement. The stock fell for 14 straight days in the April, the most in more than 25 years.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

Last Updated: January 12, 2006 19:05 EST