Since its red-hot stock market debut in November, SciQuest.com has rocketed to riches in familiar style: Its chief executive has joined the ranks of the Internet millionaires, and the company's market value has soared as high as $2.2 billion.

SciQuest is losing money, like many Internet businesses, so it emphasizes its revenue. The Web-based clearinghouse for laboratory supplies boasted in early February that its revenue rose to $2.6 million in the fourth quarter, "a 1400% increase" over the same period of 1998.

But there might be less to SciQuest than meets the eye.

The vast majority of that $2.6 million was passed on to SciQuest's suppliers in payment for goods that SciQuest never touched. As a middleman, SciQuest routes orders from buyers to sellers, takes responsibility for billing and holds no inventory. On each sale, it keeps just a small cut or commission.

SciQuest's fourth-quarter cut totaled $35,198--1.3 percent of the revenue the company trumpeted.

That wrinkle might have been lost on investors, because the news release announcing quarterly results didn't explain that SciQuest was counting revenue on a "gross" rather than a "net" basis.

Bala Dharan, a professor of accounting at Rice University's Jones Graduate School of Management, said he believes SciQuest should record as revenue its commission, rather than the full amount of each sale, because the company's role is essentially to unite buyer and seller.

SciQuest says it would be inappropriate to measure its revenue that way. The company explained its accounting method in a prospectus filed with the Securities and Exchange Commission last year, and Chief Financial Officer James J. Scheuer noted that regulators didn't object.

In the dot-com economy, the financial results that companies report aren't always what they seem.

Some Internet retailers sell goods at discounted prices and compute revenue as if customers paid full price. Popular travel sites claim as revenue the amount they charge travelers for airline tickets, though they act as little more than intermediaries between consumers and airlines. A host of Web sites have displayed banner ads for other sites on a barter system--you run my ad, I'll run yours--and then reported advertising revenue as if they got paid real money.

And it isn't just dot-coms.

The pitfalls of Internet accounting are part of a growing unreality in corporate America's financial statements, regulators and other observers say.

Some businesses use accounting methods that pass muster with auditors and regulators but strain common sense. Others break the rules to make themselves look more successful than they really are.

"In addition to . . . time-honored methods of inflating results, companies are also using novel and creative methods to cook the books," Richard H. Walker, director of enforcement at the SEC, warned in a December speech, citing high-technology companies especially.

In "the numbers game," SEC Chairman Arthur Levitt Jr. declared more than a year ago, "integrity may be losing out to illusion."

Concerns about the way corporations count revenue prompted the SEC to issue new guidelines on "revenue recognition" in December--and at least 32 companies have changed their accounting policies as a result, according to a March 10 report by accountants at the investment firm Bear, Stearns & Co.

The vagaries of Internet accounting are so troubling to the SEC that it has asked a task force of the Financial Accounting Standards Board (FASB) to clarify the rules. The task force last week began debating the question of when companies should report net revenue and when they should report gross revenue, but it reached no conclusion.

That question, the pivotal issue for companies such as SciQuest, may prove difficult to answer, given the complexity of the subject and the clash of opinions. "There is not a robust, across-the-board general rule that makes it all clear, and I'm not sure whether we'll be able to come up with one," said Timothy S. Lucas, chairman of the task force.

In a realm where share prices defy gravity and profits are as scarce as track records, gaps and gray zones in the rules leave considerable room for creative accounting, experts say.

The standards that govern the way American business keeps score, written for a bricks-and-mortar economy, often translate poorly to the world of e-commerce, financial experts say. Business-to-business Internet companies such as SciQuest are a new breed, not quite comparable to old-style enterprises that stock stores and warehouses with products that might or might not sell.

Priceline.com, which helps travelers book reservations, is another case in point. It counts the full amount the customer pays for a plane ticket, hotel room or car rental as Priceline revenue, when most of the money passes through to the airline, hotel or rental company. That enabled Priceline to report an eye-popping $482.4 million in revenue last year--instead of a considerably less impressive $59.4 million.

Priceline said its revenue reflects the full price customers pay for travel reservations partly because it "bears the risk of customer nonpayment." The risk is limited, because Priceline requires the customer to guarantee payment by credit card before the company processes an order.

"There's an intuitive gap between what they report and what the fundamentals of the business seem to be," said Eric Von der Porten, a money manager with Leeward Investments LLC, a Silicon Valley hedge fund. "It certainly makes me question whether the company is trying to pump its revenues to appear to be more than they are."

Cheap Tickets Inc., which sells nonrefundable airline reservations on and off the Web, counts the ticket price as revenue on most of its bookings. Cheap Tickets faces "no risk because we don't pay for a ticket unless we sell it," said Dale Jorgenson, the company's chief financial officer.

"That's one of the beauties of our model."

Other dot-coms use accounting policies that have smaller effects on revenue but are harder to defend, some experts say.

During the holiday shopping season, coupons typically cut $10 off a $19.99 compact disc purchase at music vendor CDNow Inc. But the company would count the full $19.99 toward its reported revenue. Overall, counting coupons as cash added $2.5 million to fourth-quarter revenue--4.7 percent of the total.

"All I can say is, our current reporting for coupons is consistent with regulatory requirements," CDNow spokeswoman Deborah Vondran said.

At Barnesandnoble.com, coupon redemptions contributed $6 million to the online bookseller's 1999 revenue--3 percent of the total. Barnes & Noble has disclosed that it may omit coupons when it tallies future revenue.

At Web-based media companies such as Salon.com, advertisers routinely pay not in cash but rather in kind--by trading for ad space on their own sites. Many companies have put a dollar value on these barter deals, which accounted for 15 percent of Salon's revenue during the last three months of 1999 and 26 percent during the prior quarter.

Salon.com Chief Financial Officer Todd Hagen said Salon doesn't swap ads "to gin revenue"--it does it to make use of ad space the company could not otherwise sell. "Rather than putting up house ads here [promoting Salon], we are putting up a banner of someone . . . who's doing the same for us," Hagen said.

Salon did not count barters as revenue until it was preparing to sell stock to the public and its auditors "forced" it to, Hagen said.

By contrast, MarketWatch.com Inc. logs no revenue from its barter deals, saying in an SEC filing that "the value cannot be objectively determined with any degree of reliability."

The FASB task force weighed in on barter deals in January, saying that including them in revenue may lead to "artificially inflated" stock prices. In the future, bartered ads should be assigned no value unless a company's track record shows that it can sell the advertising, the task force concluded.

Though creative accounting has a long history, the new economy has raised the stakes. Many executives are sitting on huge piles of stock and options. The flimsiest stocks can soar to nosebleed altitudes--while shares of well-established companies can tumble over a cliff if the quarterly numbers fall short of Wall Street's expectations.

The losers in the numbers game include investors who rely on the figures a company announces "only to find out later on that the value of what they bought was not what they thought," Walker, the SEC's enforcement director, said in an interview.

To be sure, investors in Internet stocks aren't always guided by the numbers. Some are buying into a vision of the future, and others are buying what Federal Reserve Chairman Alan Greenspan has called the equivalent of a lottery ticket. What's more, inflating revenue--the "top line" on a financial statement--doesn't necessarily have any effect on the bottom-line profit or loss.

But many of the distortions involve the top line--and, for Internet companies that have no profits, that is frequently the most closely watched indicator of performance.

"I would say that people are in some cases trying to show [gross revenue] because that gives them a higher per-share price," Lynn E. Turner, the SEC's chief accountant, said in an interview.

So should SciQuest's fourth-quarter revenue be measured in millions of dollars or in tens of thousands?

Here's how the service works. The SciQuest Web site lists a huge volume of scientific products offered for sale by hundreds of suppliers or manufacturers. A scientist shopping for, say, a centrifuge can peruse the offerings, compare prices and place an order online. The order is immediately forwarded to the supplier, which ships the product directly to the scientist's lab.

As the SciQuest Web site tells suppliers, "When the order is filled, you forward the product price and applicable taxes and shipping charges to SciQuest.com. . . ." Then, "SciQuest.com pays you for the product, less the agreed upon commission, and we collect the payment from your customer."

SciQuest relies on its suppliers to such an extent that "we have little or no control over the fulfillment of buyers' orders," the company said in its prospectus.

SciQuest's Scheue said the company is using "the appropriate way to recognize the revenue because we are taking all the risks and rewards of purchasing the product from the supplier and selling it to the buyer."

One risk is that SciQuest must pay the supplier whether or not the customer pays SciQuest, Scheuer said. By his account, the money SciQuest puts in reserve to cover the risk equals 1 percent of sales, and, as of a Feb. 25 interview, every customer had paid on time.

"It is not clear to me that they have really gone to the same risks . . . that a typical company does when they do a sale," Rice University's Dharan said. "In many ways it's really a new form of transaction."

Analogies from the bricks-and-mortar economy only go so far. Does SciQuest most closely resemble a traditional retailer, entitled to take credit for everything it sells? Or is it more like Merrill Lynch & Co., which earns brokerage commissions but wouldn't think of counting as revenue the full $6,475 you paid for 100 shares of America Online?

In its December guidelines, the SEC, which regulates disclosures by publicly traded companies, said its criteria include whether a business "has risks and rewards of ownership" and whether it "takes title to the products"--which SciQuest does while the goods are being shipped from supplier to buyer.

While the SEC didn't challenge the way SciQuest measures revenue, regulators did object to another of its accounting policies before allowing the firm to sell shares to the public.

To build business relationships, SciQuest has given key customers and suppliers warrants to purchase its stock. The company must take periodic charges against earnings to account for those grants. SciQuest planned to base all future charges on the stock's initial offering price. But the SEC instructed the company to adjust for changes in the stock price over time, Scheuer said.

The way SciQuest attempted to value the warrants could have buoyed the company's earnings. That's because the stock is worth much more than the initial offering price of $16. SciQuest's shares rose as high as $84.12 1/2 in December; they closed at $43.37 1/2 Friday.

The 1,400 percent increase in revenue that SciQuest touted accompanied a fundamental transformation of its business. The gross revenue that comes from online sales didn't begin until May, when the Web-based marketplace debuted. The company remains far from profitable. Losses rose to $18 million in the fourth quarter, from $2.2 million a year earlier.

One of SciQuest's competitors, Ventro Corp., formerly known as Chemdex, also counts as revenue the full price of goods sold over its Web site. But it warned this month that its numbers and those of other Internet companies may look a lot different if the accounting authorities issue new guidelines.

"If we are required to change our accounting policies, we may in the future report substantially lower revenues, and we may be required to restate the results from earlier periods," Ventro said in a document filed with the SEC on March 6.

"This could cause the market price of our common stock to fall significantly," Ventro said.

How It's Reported

SciQuest reports revenue on a "gross" rather that "net" basis. Gross includes money that passes through to suppliers and shippers. Here is an excerpt from SciQuest.com's fourth-quarter financial statement:

Fourth-quarter ended Dec. 31, 1999

Revenue $2,638,654 * What SciQuest collected from customers ("gross" revenue)

Cost of revenue $2,603,456 * What it paid its suppliers and shippers

Gross profit $35,198 * What's left for SciQuest before other expenses

Net loss $18,037,455

Priceline.com, which lets consumers book travel reservations, also reports revenue on a gross basis.

12 months ended Dec. 31, 1999

Revenue $482,409,988 * Total sales, including what customers pay for plane tickets bought through Priceline)

Cost of revenue

Product costs $423,056,185 * What Priceline pays hotels and car-rental companies for ticket reservations

Supplier warrant costs $1,523,036 * Stock options awarded to suppliers to keep their business

Gross Profit $57,830,797 * What's left for Priceline before other expenses

Net loss $1,055,089,534

SOURCE: Company Reports