Thousands of small investors are hit as their recently acquired SmartForce shares fall by more than a third overnight on disclosure of improper accounting. Jamie Smyth reports

Further woes were heaped on technology stock investors this week with the disclosure by SkillSoft that SmartForce - the Irish e-learning company which it recently acquired - had improperly accounted for revenue during a three-year period.

Thousands of small investors in SmartForce, many of them based in the Republic, saw the value of their recently acquired SkillSoft shares fall by more than a third overnight. Following the latest in a series of accounting revelations by an Irish firm, the value of the business - which had a market capitalisation of $560 million (€560 million) when the merger was first announced in April 2002 - is now below $200 million.

But such destruction of shareholder value won't shock the seasoned investor in Irish technology stocks any more. Over the past two years, several billion dollars have been wiped off the value of high- tech firms based in the Republic.

Riverdeep, Baltimore Technologies, Trintech, Iona and SmartForce have all seen their market capitalisations drop by more than 75 per cent since the technology bubble burst in March 2000. And the fledgling technology index on the Irish Stock Exchange which was worth a quarter of the overall market at launch in September 2000, now accounts for just 5 per cent of the ISEQ's total value.

But aside from the technical slump in the value of indices, markets and companies, the bursting of the high-tech bubble has seen many ordinary shareholders lose the vast majority of their investments, and in many cases wiping out their hard-earned savings.

So what went wrong? Many market-watchers blame the tremendous hype generated by one of the longest-running bull markets in recent stock market history for the excesses of the technology boom.

"To some extent we all got carried away in the hype and the idea of a new paradigm for technology firms. But it just wasn't true. The last time we had that was with tulips in Holland," says Mr John Coolican, technology analyst with Merrion Stockbrokers.

Clearly, this new paradigm, which promised that technologies would create endless efficiencies to transform the industrial model and overturn traditional economic cycles, was grossly wrong.

According to Mr Coolican, of all the Irish technology companies, Baltimore Technologies was hyped enormously and other firms, such as Datalex, were then carried along by the momentum. But what both companies had in common was an inability to create the necessary sales as public firms to justify astronomical ratings.

"In the absence of being able to apply a multiple to earnings, we applied a multiple of sales... All of the Irish technology companies have suffered from contracting price/sales ratios... but it is not even the multiple that has come down, sales are also down."

Trintech, Baltimore, SmartForce and Iona have all seen their revenues slump over the past year as corporates slash their IT budgets in a move to save cash during the economic downturn. Many of these companies - which were previously valued on many times their sales forecasts - are now worth less than the amount of cash on their balance sheets, effectively placing little or no value on the firm's software or products.

Most analysts and chief executives are now valuing technology firms in exactly the same manner as they do traditional "bricks-and- mortar" stocks. Ms Carly Fiorini, chief executive of HP, summed up this new approach recently when she forecast IT company's revenues would not grow at a rate of 20 per cent as it had in the past.

But there are an additional three big negatives which are weighing down share prices and sales: the potential war with Iraq, the recession and the issue of whether revenue numbers provided by these firms can be trusted, says Mr Coolican.

The admission from SkillSoft this week that SmartForce may have booked $40 million in revenues earlier than it should have, was just the latest in a string of such accounting revelations which began with Enron, and has subsequently affected some of the world's biggest technology firms.

Xerox, WorldCom and Global Crossing have all admitted that they illegally inflated millions of dollars of revenue during the technology boom. And with the spotlight of the Securities and Exchange Commission firmly on companies' accounts, several Irish firms including Elan, Baltimore Technologies and SmartForce's sister firm Riverdeep have come under close scrutiny in recent months, causing huge sell-offs in their shares by investors.

Many companies have blamed the huge pressure to meet over- aggressive growth forecasts set by analysts as one of the reasons for inflating revenues. In a recent interview with The Irish Times, Trintech chief executive Mr Cyril McGuire said he had spent much of the boom talking down over-optimistic analyst forecasts. But few objective observers would rule out the role that greed played in fuelling the technology boom. Baltimore Technologies last year blamed the over-zealous activities of a few of its sales staff for inflating sales figures by more than £5 million (€7.87 million) in 2000.

With most sales staff in the software sector earning huge sums during the boom on commission it is hardly surprising that some sales were booked ahead of schedule in this manner. But the sheer volume of allegations of corruption against high-profile chief executives, such as WorldCom's Bernie Ebbers, suggest excessive greed reached into the boardroom.

Mr Ebbers benefited from $408 million in loans from WorldCom at a time when the company slipped towards bankruptcy, robbing shareholders of $70 billion.

A handful of corporate executives have been indicted including Mr John Rigas at the US communications firm, Adelphia, and Mr Dennis Kozlowski, at Tyco, each accused of misusing funds on lavish items and ventures.

Similar indictments against individuals have not been made at any technology firms in the Republic, and yesterday Mr Greg Priest, chief executive of SmartForce, insisted the e-learning company had been "scrupulously honest" in reporting all its financial results.

In a conference call with analysts yesterday, SkillSoft management would not disclose any further details on the nature of the accounting issues at SmartForce. No details are likely to be made available until the company's auditors have undertaken a full review of SmartForce's books of account.

The absence of clarification on this issue, at least in part, contributed to a further 10 per cent fall in SkillSoft's share price yesterday, further impacting its shareholders.

It has also emerged that SmartForce will face a class action law suite in May, which is being taken by a number of investors. The investors, who are represented by the US law firm Gold Bennett Cera & Sidener, initiated the suit in 1998 following major slump in the firm's shares in that year.

"It alleges that during a period the company and certain defendants made false and misleading statements about revenues," says Mr Steven Sidener, lawyer on the case for Bennett Cera & Sidener, who says the investors are seeking $500 million in damages.

The complaint notice seen by The Irish Times also claims to show several CBT executives sold substantial amounts of stock several months prior to a major profit warning issued by CBT Systems.

A court date in May 2003 has been set, says Mr Sidener.

Meanwhile, SmartForce's sister e-learning firm Riverdeep, has not boosted investor confidence by failing to provide satisfactory financial detail on its acquisitions, delisting from Nasdaq and subsequently suggesting a management buy-out. Unsurprisingly its shares have tanked and short sellers have been attracted to the stock.

Investors can only hope there is more transparency in the future to avoid the sharp sell-offs that have hit SmartForce, Riverdeep and most of the dwindling crop of quoted Irish technology firms.