U.S. securities regulators are investigating the video game industry's accounting practices from the late 1990s until about 2002, raising questions about how game publishers have recognized sales during an unprecedented industry boom.
A person familiar with the Securities and Exchange Commission probe, speaking on condition of anonymity, said on Monday that regulators were examining how game publishers recorded revenue from game sales during the period.
Industry analysts said the investigation was probably considering two key questions: at what point in a game's release did the publisher recognize revenue from its sale, and whether reserves taken as insurance against weak sales were being used to smooth out revenues. A spokesman for the SEC declined to comment on the probe.
Analysts cautioned that if video game companies were no longer able to take large reserves as insurance against underperforming titles, it could become more difficult for investors to predict sales in the already hit-driven market for game software, one analyst said.
"No one is under-reserved in our view, so any tightening of the rules could lead to acceleration of revenue recognition and earnings, although the stocks may become even more volatile without the ability to smooth results by managing allowances," RBC Capital Markets analyst Stewart Halpern said in a note.
Four publishers - Acclaim Entertainment Inc., Activision Inc., THQ Inc. and Midway Games Inc. - have already said they are part of the probe, though no violations of the law have been implied.
Shares of THQ, known for children's titles like "SpongeBob SquarePants," ended off $1.00, or 5.7 percent at $16.70 on Nasdaq after falling as low as $15.75. Shares of Activision, maker of the "Tony Hawk Pro Skater" franchise, fell $1.17, or 9.4 percent, to $11.29 after dropping as low as $11.20.
Shares of Acclaim, which publishes the "Turok" series, slid 2 cents, or 2.9 percent, to 66 cents and dropped as low as 63 cents. Shares of Midway, known for the "Mortal Kombat" martial-arts franchise, ended off 15 cents, or 4.4 percent, at $3.27 on the New York Stock Exchange after trading as low as $3.15.
SOURCE:
Reuters.
