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. 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.
The Securities and Exchange Commission (SEC) should take action in this situation for several reasons.
Firstly, it is important for companies to adhere to standard accounting practices and disclosure requirements. These practices exist to ensure transparency and to provide investors with accurate and reliable financial information. When companies write off significant amounts of inventory, it can distort their financial statements and misrepresent the true value of their assets. This can potentially mislead investors and affect their decision-making.
Secondly, if companies later sell the previously written-off inventory without disclosing it, it can lead to overstatement of profits in future years. This can create an inaccurate picture of a company's financial performance and can artificially inflate its stock price. Without proper disclosure, investors may not have all the necessary information to make informed investment decisions.
Lastly, failure to enforce accountability and ensure disclosure of inventory sales can open the door to potential insider trading. If this information is only available to a limited audience, it puts those with access to it at an unfair advantage over the general public. This goes against the principles of fair and equal access to information for all investors.
Therefore, the SEC should intervene to enforce proper accounting practices, ensure disclosure of inventory sales, and protect the integrity of the financial markets.