Table: How Cisco Tripped Up the Sherlock Holmes of Accounting

Howard Schilit, a former American University accounting professor, has been dubbed "the Sherlock Holmes of accounting." As the director of the Maryland-based Center for Financial Research & Analysis, he and his team of forensic accountants attempt to unravel financial results for major investors. But Cisco's (CSCO ) latest quarterly results confused even him. If the most prominent forensic accountant couldn't get it right, what chance do investors have?

NOV. 5, 2001

In a conference call with analysts, Cisco reveals that its "normal reserves for accounts receivable and credit memos, as well as reserves for leases and structured loans" had declined in the quarter to 9% from 15% despite a worsening economy.

NOV. 7

Schilit's Center releases an explosive report. It claims that Cisco's reduction in reserves was responsible for its reported 3.5% rise in quarter-to-quarter revenue. If Cisco had reserved at the previous quarter's level, it would have reported a revenue decline of 3.3%.

DEC. 12

Cisco files its 10Q. The percentage breakdowns for these reserves are nowhere to be found. But on page 20, Cisco refers to "revenue adjustments" that include such things as "customer incentives and other discounts." The $409 million reduction in sales and $649 million for the previous quarter match the reserve percentages reported on Nov. 5.

DEC. 21

Cisco vigorously disputes the Center's analysis after a BusinessWeek inquiry. The company insists that the "revenue adjustment" in its 10Q was one of many and does not reflect its total adjustments. Cisco points to data to support its claim that bad debt reserves have in fact increased, but it declines to detail all the adjustments.

JAN. 9, 2002

The center backs down from its analysis, but Schilit remains suspicious. "The fact that a company apparently said certain things in a conference call that don't jibe with its SEC filings obviously doesn't make one feel very comfortable," he says.

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