The Rising Influence of Rising Affluence

[DewDiligence]

What changed your IBM bullish stance?

The company’s unduly aggressive accounting for “workforce rebalancing,” which means hiring in low-cost countries such as India and firing in high-cost countries such as the US. I don’t object to this practice per se, but rather to the way IBM excludes costs related to the hiring and firing from non-GAAP EPS. IBM considers these rebalancing costs as non-recurring (and thus legitimate to exclude from non-GAAP EPS), but they are a regular part of IBM’s business model and hence they recur every year.

In 2013, IBM excluded $1B of rebalancing costs from non-GAAP EPS, which made poor operating results look satisfactory according to this metric. I reasoned that if IBM has been treating such clearly recurring costs as non-recurring, they could well be using other aggressive accounting tricks to frost the sales and earnings numbers.

IBM has a history of aggressive accounting, but I thought they had cleaned up their act in the past couple of years. Evidently, they haven’t.