IBM said that US securities regulators were formally investigating the world's biggest computer services company's first-quarter earnings report and expensing of stock options.

The disclosure, which sent the company's shares down as much as 1.3 per cent, follows an informal investigation that International Business Machines Corp. revealed in June. The stepped-up investigation gives the US Securities and Exchange Commission the power to subpoena documents, e-mails and individuals.

First-quarter 2005 profit fell short of the average analyst estimate by five cents per share, a big miss for IBM. But many analysts eventually concluded the miss was nine cents per share, or nearly double the apparent shortfall, once they understood IBM's accounting for stock options.

The announcement of a formal probe is "mostly a headline risk" for IBM's image among investors, said Richard Petersen, an analyst at Pacific Crest Securities.

"I do think the change in the status makes it more likely that the SEC will find some fault with their disclosure practice. Most people already knew about this," he said.

Following SEC requirements, publicly traded companies in the United States have begun reporting expenses of granting stock options to employees, dragging down earnings. IBM began expensing options in the first quarter of 2005, a year earlier than required by law.

IBM said it was cooperating in the investigation. The SEC said the investigation "should not be construed as an indication that any violations of law have occurred," the company said. "IBM has no reason to believe that the accuracy of reported earnings for the first quarter of 2005 is at issue," said IBM spokesman Edward Barbini. He declined further comment on the investigation.

IBM based in Armonk, New York, in June said SEC investigators were seeking information about the company's April 5 disclosure of a plan to treat options to employees as an expense, as well as the disclosure nine days later of weaker-than-expected earnings. After the earnings report, several financial analysts complained that IBM, in effect, had led them to believe that the stock options' impact on first-quarter results would be larger than it actually was.

"It took way too long," for the SEC to move ahead with the investigation, said Doug Christopher, an analyst at Crowell, Weedon & Co., which has no investment banking relationship with IBM. "It's six months. That's a long time" and a "disservice to the investment community" by the SEC.

Shares of IBM dipped one per cent to $82.71 in extended trading on Inet. In regular trade on the New York Stock Exchange, the shares fell 60 cents, or less than one per cent, to close at $83.57.