Questionable Accounting Practices at FAST Cast a Pall on Microsoft Acquisition

Article ImageIn its eagerness to make an impact in the enterprise search marketplace—a sector it has yet to satisfactorily conquer—Microsoft may have overlooked, or been inclined to dismiss, a number of apparent accounting irregularities on Fast Search & Transfer’s books when it acquired the Norwegian search company for $1.2 billion in January 2008. The problems were no secret even then—inquiries related to FAST’s accounting practices during the press conference call announcing the acquisition were met with pregnant pauses and "no comments"—but the story has grown more embarrassing for Microsoft in recent weeks as more details emerge about FAST and amid reports in the Norwegian press that the matter may come under criminal investigation. reported on May 29 that Norway’s financial supervisory authority, Kredittilsynet, concluded that FAST’s accounting problems appear not only to be unethical but illegal as well. The supervisory agency referred the matter to investigators at the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime. That agency "concurred that the nature of the irregularities and the amount by which FAST Search apparently inflated its accounts were serious matters warranting prosecution. But the agency said it was too busy to open a criminal investigation," Portfolio reported.

Talk of a criminal investigation sent the Norwegian press on the trail and set fire to the American technology blogosphere. In late June, the blog TechCrunch picked up a story from the Norwegian magazine Dagens Naeringsliv that cast a bright light on FAST’s accounting practices. TechCrunch reported that the article by Trond Sundnes of Dagens Naeringsliv and Goran Skaalmo described "how the company booked free software trials as revenues, and how its executives set up shell corporations for allegedly self-dealing purposes." In total, FAST booked $50 million in fake revenue and $20 million in fictional contracts, the article revealed.

In response to the Portfolio story, Microsoft issued a statement that The Seattle Times posted on its Microsoft Pri0 blog on May 29. The statement read, "Through publicly available information, we were aware of the review of FAST’s historical accounting practices and their efforts to implement improved financial controls. Since completing our tender offer, we have taken several steps to align these efforts to Microsoft’s high standards for financial reporting and controls. We remain absolutely confident in our decision to acquire FAST for its talent, technology, and valued customer relationships."

Many bloggers covering the story raised questions about whether FAST’s shady accounting practices were somehow an indication that its technology is not quite as sturdy as purported—after all, if its product is so great, why can’t it close deals? Theresa Regli, principal at CMS Watch, dismisses the notion. "FAST has always been renowned for its speed and scalability, so in many ways, from a technology perspective, it was a good choice [for Microsoft]," Regli says. "Poor financial practices on the part of senior management don’t necessarily reflect poorly on the technology, but it should be enough to make a buyer look elsewhere for something comparable from a financially healthier (or at least more honest) company," she continues.

Adriaan Bloem, a contributing analyst to CMS Watch, who is based in the Netherlands and has been observing the FAST story closely, agrees with Regli that accounting practices don’t necessarily reflect badly on the technology, but adds, "On the other hand, though, the sequence of first having dubious sales practices, then correcting the books and firing staff in 2007, then selling to Microsoft, has triggered the departure of many of FAST’s best engineers. Also, FAST has been suffering severely from expansion anxiety: Its sales staff would promise anything, leaving engineers to deliver. Since FAST was selling quite a lot (or at least doing a lot of trial runs) their tech resources were spread out too thin and often they couldn’t make good on the original promises."

It seems to be the case that while Microsoft was aware of FAST’s problems, it probably didn’t anticipate the emergence of so many gory details (or the blogosphere gleefully slapping FAST with the sobriquet "the Enron of Norway"). And while FAST couldn’t have faked the speed and scalability of its products, its problems at the top may well have coaxed some of the main brains in the engineering department to make a fast exit.

Bloem sums up Microsoft’s current position thusly: "They bought a shiny convertible that looked really good in the showroom at full price; they should have gotten it at the junkyard for its parts."    

Neither Microsoft nor FAST responded to  requests for comment.