Question

Competency

Evaluate accounting-related legal and ethical business implications.

Scenario

During your weekly meeting, the Director of Accounting has shared with you the topics discussed at a recent Association of Certified Fraud Examiners (ACFE) meeting. Of particular interest was the agenda item about how some companies have gotten in regulatory trouble with the SEC over their revenue and expense recognition practices. While you both are confident that there are no issues relating to this at your company, you both decided that you wanted to learn more about these cases.

The Director of Accounting wants you to research two such cases and write a summary report to present at the next Accounting Department meeting. The director believes that understanding what has happened to other companies in this area of accounting can help prevent issues in your company.

The Director provides you with the SEC website that they have used in the past to do article searches: www.sec.gov

Instructions

You are asked to select two recent SEC actions against companies (not individuals) that relate to revenue and expense recognition and Prepare a Word document that:

1. summarizes reasons for the SEC actions.
2. identifies the SEC issues related to accounting data and/or operations and the remedial actions assigned and/or penalties given to the company.
3. critiques the remedial actions/penalties.
4. Gives an opinion as to whether you believe they will be effective in preventing future violations by the company.

Answer 1

Revenue is recognized, if the following criteria must be met:

1. Persuasive evidence of an arrangement must exist;

2. Delivery must have occurred or services been rendered;

3. The seller's price to the buyer must be fixed or determinable;

4. Collectability should be reasonably assured.

A registrant should disclose its accounting policy for the recognition of revenue pursuant to FASB ASC Topic 235, Notes to Financial Statements. FASB ASC paragraph 235-10-50-3 thereof states that “the disclosure should encompass important judgments as to appropriateness of principles relating to recognition of revenue . . . .” Because revenue recognition generally involves some level of judgment, the staff believes that a registrant should always disclose its revenue recognition policy. If a company has different policies for different types of revenue transactions, including barter sales, the policy for each material type of transaction should be disclosed. If sales transactions have multiple units of accounting, such as a product and service, the accounting policy should clearly state the accounting policy for each unit of accounting as well as how units of accounting are determined and valued. In addition, the staff believes that changes in estimated returns recognized in accordance with FASB ASC Subtopic 605-15 should be disclosed, if material (e.g., a change in estimate from two percent of sales to one percent of sales).