Many high-technology companies, like Nortel Networks, Micron Technology and JDS Uniphase, have written down massive amounts of their inventory. For example, Nortel Networks revalued some of its inventory parts at $0, though the inventory initially cost Nortel $650 million.
Companies are required to report whether they write off the cost value (or book value) or their inventory even if they do not dispose of the inventory. Later on, they may sell this inventory but are not required to report the sale for cash of previously "worthless" inventory. The effect may be that in future years, when the inventory is sold, profits are overstated.
Also in the article, JDS Uniphase said it will write off $250 million of its inventory but promised to disclose any future sale. On the other hand, Micron Technology, which wrote down $260 million, won't disclose any future sale (Krantz, 2001). Should the Securities and Exchange Commission do anything? Why?
Yes, there should be standard accounting practices and disclosure enforced in this arena. Without the relevant information informed decisions on stock value can not be made with any certainty. There are several reasons why the company might do this.
One is to manipulate stock prices, perhaps encouraging equity investment where a prudent investor would not act given more information, the second is to manipulate the income statements either for purposes of taxability, or in order to acquire debt. When accountablility is not enforced, and the information not provided on the resale of previously written off inventory, then the danger of 'insider trading' increases, because the information is only available to a limited audience.
To address this issue, the Securities and Exchange Commission (SEC) should take action. They are responsible for regulating and overseeing financial markets in the United States. Here is how the SEC could potentially handle this situation:
1. Enforce accounting standards: The SEC should ensure that companies adhere to proper accounting practices when it comes to inventory valuation and write-offs. This will help maintain consistency and transparency in financial reporting.
2. Require disclosure of future sales: If a company decides to write off its inventory, it should be required to disclose any future sales of that previously written-off inventory. This will provide investors with important information about the company's financial health and prevent potential overstatement of profits in future years.
3. Monitor potential market manipulation: The SEC should closely monitor companies that engage in inventory write-offs to determine if there is any manipulation of stock prices or income statements. This will help maintain fair and efficient markets and protect investors from misleading information.
4. Investigate potential insider trading: If there are suspicions of insider trading related to the information about upcoming inventory sales, the SEC should investigate and take appropriate actions to ensure market integrity.
Overall, the SEC plays a crucial role in maintaining transparency, fairness, and investor protection in financial markets. By enforcing accounting standards and requiring disclosure of future sales, they can address the concerns raised by inventory write-downs and prevent potential market manipulation.