Software companies are failing to curb their over aggressive revenue recognition polices despite a golden opportunity to blame SOP 97-2, the new accounting standard in this area, for any temporary shortfall in revenues. This is the view taken by Fin Most, Ernst & Young’s National Director of Audit and Accounting for E&Y’s Technology Industry Group in the US. His comments were seconded by colleague Rich Frick, an audit partner at E&Y responsible for signing off on the financial statements of several high profile software companies, including PeopleSoft Inc. The industry is not availing itself of the opportunity to become more conservative, said Most, addressing analysts at a software conference in San Francisco. Most was trying to explain to the investment community some of the difficulties the software industry faces in interpreting SOP 97-2, the new standard on revenue recognition. And despite being confronted with some tough new rules designed specifically to prevent the up-front recognition of software license fees, companies are too scared of missing a quarter’s targets to change their ways. It seems that the possible negative effect on share price and the corresponding blow this would deal to outstanding share options has proved too much of a disincentive. But the arguments for a less aggressive approach are also persuasive, says Most. If the more dubious elements of license sales were deferred, the benefits would be increased stability and predictability in future quarterly revenues, cushioned by a bigger deferred revenue reserve on the balance sheet. Also, companies could potentially close more long- term business at the end of a quarter if they were less concerned with the immediate terms of the deal. But, he warned, it would require a more mature, longer term attitude from analysts and investors during the period of adjustment, as revenue and profit growth would appear to slow down at certain companies whose stock currently trades on huge expectations. Those firms who wanted to report business as usual, he said, would have to build up evidence to support their cases, which is possible but requires aggressive interpretation of the facts. A committee of senior accountants and industry representatives is working to publish clearer guidance on implementing SOP 97-2, and for those who take the aggressive approach, this could spell restatement of past periods. In the meantime, companies which choose to be conservative (a phrase which all software firms seem to be keen to use) should have no real difficulties.
