Readers Report
Getting to the Bottom of Cisco's Numbers
"Cisco: Behind the hype" (Cover Story, Jan. 21) quotes Abraham J. Briloff, professor emeritus at Baruch College, as saying that Cisco Systems Inc. "suppressed a grand total of $18.2 billion in costs" when it accounted for certain acquisitions by the pooling-of-interests method. Yet you challenge accounting for the $3.8 billion in research and development write-offs as purchases-- which suggests that using either method is somehow inappropriate.
I'm sure that "Cisco follows generally accepted accounting principles" would be a less engaging story. Until the Financial Accounting Standards Board issued new rules as of July 1, 2001, companies were required by GAAP to account for acquisitions as poolings when certain, highly restrictive criteria were met, and as purchases when they were not. Neither Cisco nor any other company had a free choice in accounting for mergers--accounting as a pooling or purchase was dictated by the terms of the deal. And GAAP required immediate write-off of in-process R&D acquired in a purchase.
Dennis R. Beresford
Professor of Accounting
University of Georgia
Athens, Ga.
Editor's note: The writer is former chairman of FASB.
Larry R. Carter, Cisco's chief financial officer, maintains that pro forma numbers portray the company's operating results more accurately--because they exclude volatile charges, such as acquisitions. Carter says: "It's sort of like, `What do you like, vanilla or chocolate? We're going to give you both, so you can choose."' BusinessWeek correctly points out that "in the latest quarter, more than a third of Cisco's pro forma earnings come not from operations but from interest and other income." When it comes to "operating results," it sounds as if Carter and CEO John Chambers are serving a generous helping of mud pie in the face of investors.
Robert Bubnovich
Irvine, Calif.
I applaud "One accounting code for all" (Editorials, Jan. 21). However, your derisive views of pro forma earnings in "Cisco: Behind the hype" are off the mark. Our professional association, Financial Executives International, along with the National Investor Relations Institute, published guidelines on the use of such metrics last year.
When abused, any reporting tool can be harmful to investors. When used constructively and in compliance with the FEI/NIRI guidelines, such metrics give much-needed information to investors. In fact, pro forma earnings try to get at the cash flow and operating earnings you call for in the editorial.
Philip B. Livingston
President and CEO
Financial Executives International
Morristown, N.J.
Your article did justice to the Cisco hype but failed to mention the tens of millions of dollars Cisco off-loaded to its wireless partners. On Nov. 15, Cisco stunned its "Advanced Technology Partners" by unilaterally announcing that the WT-2750 product line was immediately end-of-life and end-of-sales. This is creative accounting at its finest: Get others to make and sell products you have branded so you can hype your stock as a "service-provider partner" and let others take the losses.
Ken McLeod
Chief Executive Officer
CSG Wireless Inc.
Mesa, Ariz.
I could not suppress a wry smile when I read about Cisco and learned that as the second [fiscal] quarter closed, CFO Carter oversaw a rush to cram machines on trucks so they would be counted as "sold."
About 18 years ago, when I was working for Wang Laboratories Inc. in Lowell, Mass., I remember rumors about the same practice: trucks driving around with unfinished inventory so that it could be counted as sales and maintain Wang's "phenomenal" growth. Sadly, it didn't help in the long run, and Wang disappeared, taking a large number of employee pensions with it, including mine. Curiously, Cisco CEO John Chambers was a senior vice-president at Wang around that time and obviously learned some lessons very well--but clearly not quite well enough.
Jon Wilkie
Weybridge, England
Industry insiders have known for years about the hype and house of cards at Cisco. That hype manifests itself in such a way that customers exclude or delay implementation of competitive offerings in lieu of evolving technology offered by Cisco. Customers fear that by making a competitive selection, they may harm their careers--particularly if John Chambers flies in to meet with their top company officers.
Lawrence Strawley
Unionville, Pa.
There are more than 7.3 billion shares of Cisco outstanding, and probably many more to be issued to Cisco employees in the future through stock options (not accounted for on the income statement). To make even 50 cents per share, implying a 40 price-earnings ratio at today's prices, Cisco would have to earn more than $3.6 billion aftertax. The most Cisco ever earned in a single year on a GAAP basis was $2.7 billion, at the height of the Internet/telecom boom. The lesson to be learned is that accounting can delay, but not eliminate, the true costs of doing business.
Murray Kenney
San Francisco
Is it your plan to scare every investor? I think you are trying to relate Cisco to Enron Corp.--it's not even close. The fact is, BusinessWeek will be long gone before Cisco is.
Jamie Dvorak
Pierce, Neb.
Anti-Semitism Is Hardly a Thing of the Past
Hardy Green's review of Neil Baldwin's Henry Ford and the Jews, concluding that overt anti-Semitism has been relegated to "the distant fringe of U.S. life," is disconcerting ("A titan of industry--and a bigot," Books, Jan. 21). One only has to review the tapes of President Richard M. Nixon 21 years after Henry Ford's death to see that the problems of anti-Semitism are too real. Nixon and his aide H.R. Haldeman wanted to have the Internal Revenue Service investigate all the big Jewish contributors to the Democrats. Nixon favored finding a zealot, who disliked Jews, to go after them.
Ford was a bigot, and he didn't get enough flak from U.S. Jews, as he should have. The Ford Foundation is fully aware of its founder's past and is generous in supporting Jewish causes to make up for the harm Henry Ford created with his anti-Jewishness.
William J. Levy
National Director
Organization of World Jewry
Allentown, Pa.
Henry Ford may have been "America's most notorious anti-Semite," as correctly pointed out in Hardy Green's fine review of Neil Baldwin's book, but all of Detroit and the American auto industry were rife with Jewish hatred and bias. In the 1930s, my grandfather changed both his religion (Jewish to Protestant) and his given name (Abraham to Edward) so that he could advance at the Hudson Motor Car Co. He would never had been made president of that company if the truth were known.
Stephen Reinhold
Morris, Conn.
How Can You Downgrade to "Attractive"?
I found "Will investors pay for Schwab's advice?" (News: Analysis & Commentary, Jan 21) informative, but I took particular note of the stock downgrade. On Jan. 7, analyst Amy S. Butte of Bear Stearns & Co., downgraded the stock from a "buy" to "attractive." What does "attractive" mean? With 2001 net income projected to be 50% less than 2000, you would hope for a good deal more clarity. What is the next level: "cute"? And then does it move toward "dowdy"?
David Burke
Somers, Conn.
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Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
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