Computer security provider Network Associates said today federal regulators are investigating its past accounting practices, leading the company to delay contested plans to buy the rest of McAfee.com.
The SEC has launched a formal inquiry into Network Associates' fiscal 2000 accounting practices, the California based company said.
Network Associates stock was off about 13 per cent at $21.70 in early trading on the New York Stock Exchange. Shares of McAfee, the anti-virus software maker that is 75 per cent owned by Network Associates, also fell sharply, dropping $3.40, or about 18 per cent, to $15.11 on Nasdaq.
The inquiry comes at a time when the SEC and investors are scrutinising corporate accounting due partly to the collapse of energy trading company Enron, which began with accounting irregularities.
During a conference call, Network Associates chief executive Mr George Samenuk said that the SEC contacted the company informally after it announced on December 26th, 2000 a $120 million revenue shortfall and said it would change the way it booked revenue from its distributors.
"We believe they're looking at Dec. 26 and then all of 2000, to look at if everything was properly accounted for," Mr Samenuk said.
Mr Samenuk said its outside auditors, PricewaterhouseCoopers, reviewed its accounting for fiscal 2000 and believes the accounting was proper.
Some Wall Street analysts believe the investigation is about practices of a previous management.
"Frankly I think management was clear in stating that they've gone back through the financials. The existing management team and PWC see nothing wrong with the accounting," said Mr Rob Owens, an analyst at Pacific Crest.
"It was merely a shortfall in the business and they changed some of their business practices to help mitigate the risk of that happening again," Owens said.
Nonetheless, the outlook for the stock is hazy, said JP Morgan analyst Sterling Auty, after cutting the company's rating to "market performer" from "buy."
"While the investigation will not impact operations in our opinion, and is looking at old issues, it will be a cloud over the stock until resolved," he said in a note.
Network Associates General Counsel Ken Roberts said the company was unaware what specifically triggered the formal investigation.