Warburg hits out at 'extreme' EDS accounting policy

EDS, the US computer giant at the centre of modernising the UK Government's IT systems, has been slammed for using "extremely aggressive" accounting practices.

The allegation centres on a $6.4bn (£4.2bn) deal struck with the now collapsed telecoms company WorldCom in 1999. In a report on EDS to its clients, investment bank UBS Warburg says: "We are puzzled and very concerned about the possible explanations concerning the revenue recognition and operating margins EDS is recording from its outsourcing contract."

While EDS refuses to reveal the margin on the contract, UBS Warburg has calculated that it is 14-17 per cent, "which we consider to be extreme and abnormally high", says the report.

In the UK, EDS runs around 25 per cent of the Government's civilian computer accounts, including the Inland Revenue's Self Assessment System, which ran into problems earlier this year. Costs have escalated from £1bn to £2.8bn.

The UBS Warburg report comes as US companies' accounting practices are under the microscope after the Enron and WorldCom scandals. While EDS maintains that its accounts are "conservative", the report will raise questions, coming just days after the company's chairman and chief executive Dick Brown swore to the US Securities and Exchange Commission that the company's financial results were accurate.

Written by Adam Frisch, head of UBS Warburg's US IT research team, the report stresses that, "we are not insinuating any type of illegal or fraudulent behaviour on the part of EDS". But it adds: "The only other explanation we can think of for the exorbitant margins on the WorldCom outsourcing contract is probably more serious and possibly more damaging."

A spokesman for EDS refused to discuss the individual points raised in the report. But said: "We outlined our exposure to WorldCom in July and we practise conservative accounting. That is all I would say with regards to the note. But our accounts are conservative and complete."

But it is understood that EDS had a run-in with the UBS analyst after a string of critical reports. The latest note carries a "hold" recommendation, usually a sign that the analyst has concerns over the company. Only nine of the 25 banks that cover EDS have recommend that their clients should not buy the company's shares.