More on the SEC investigation

It has been confirmed that an industry-wide probe of videogames companies by the Securities and Exchange Commission now covers four publishers - but key analysts believe that the investigation will exonerate the industry's accounting practices.

Yesterday we reported that Activision, Acclaim and THQ had all confirmed that they had been approached for information by the SEC [read more]; today it has emerged that Midway has also been asked to furnish accounting details. In ways, this means that the probe actually covers five publishers - Take Two was already under official investigation by the SEC, and it's thought that that investigation may have been the catalyst for this wider probe of the industry.

It's not clear which other publishers may have been approached for information, but it's hard to believe that any broadly-focused probe of the games industry would leave out key companies such as Electronic Arts.

Stocks in publishers have come under pressure as a result of the probe, as markets reacted nervously to what is an unusually broad investigation by the SEC. However, Wedbrush Morgan analyst Michael Pachter believes that the investigation is likely to exonerate the accounting practices of the leading publishers who have been approached for information.

He believes that the SEC is seeking to uncover any possibility of game companies smoothing over earnings figures by maintaining large reserves, a practice which is carried out by a number of leading companies in the industry. "We think that the SEC investigation is unlikely to lead to criminal or disciplinary action for any of the companies... It is our belief that these companies properly account for sales of their products, and that each is appropriately conservative in maintaining its reserves," according to Pachter.

UBS Investment Research analyst Michael Wallace, meanwhile, believes that the investigation may be focused on the practice of "stuffing the channel" prior to quarterly results being posted - a way of manipulating reserves by shipping unwanted products to retailers in time for quarterly figures, and then taking it back via excess reserves in the next quarter.

It's this kind of practice which led to the investigation of Take Two, which was forced to restate nearly two years worth of quarterly results last year due to the way it recognised revenues in its accounting.

"We believe that there is some potential that the SEC will require or recommend that the companies shift to 'sell-through' recognition of revenues, which could cause increased volatility of earnings going forward," explains Pachter. He sees the drop in share prices caused by the investigation as an opportunity for investors, however, commenting that due to the low probability of any adverse action resulting from the probe, this is a chance for investors to "buy on the dip".