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Sarbox Has Widespread Impact On Revenue Recognition Policies

One of the primary goals of Sarbanes-Oxley (Sarbox) is to ensure that companies are reporting accurate revenue numbers. Consequently, revenue recognition policies have been under particular scrutiny. A new survey of 400 public and private companies found that more than half (55%) of all public companies, have changed revenue recognition policies as a result of Sarbox and that many of these changes were "moderate"; to ";significant", as shown in Figure 1.

Figure 1
Have you modified your revenue recognition practices as a
result of Sarbanes-Oxley? (Public companies only, n=162)

Compliance Processes Inefficient

In addition, the survey found compliance processes are in need of additional investment. As Figure 2 illustrates, only 14% of public companies rated their compliance processes "highly efficient." 58% said their compliance processes may require additional investment, and 24% said additional investment is required. 4% said the processes were largely temporary fixes and will be replaced entirely.

Figure 2
How would you rate the efficiency of your key
compliance processes for Sarbanes-Oxley 404?
(Public companies only, n=162)

Processes that represent the largest ongoing control risk or remediation challenge were "workflow and approval processes" and "eliminating spreadsheets." Approval processes are the source of executive liability and therefore a major issue. The pervasiveness of spreadsheets and the specialty calculations they perform are making them difficult to replace. But susceptibility to errors and resistance to documentation makes them a major source of risk. Approximately one-third of companies said "contract management" and "revenue recognition" represent the next tier of risk and remediation challenges.

All of these processes are targeted for technology investments in 2005. In many cases they are inter-dependent, for example, contract data drives revenue recognition. As a result, 77% of companies evaluating compliance technology are considering solutions for two or more processes.

"As compliance processes evolve, many companies will look to technology to achieve both compliance and business benefits, said Kathleen Wilhide, Director of Compliance and Business Performance Management research at IDC. "By automating revenue recognition processes, organizations can more readily achieve revenue compliance as well as improved revenue reporting This not only reduces risk, but lays the foundation for better business performance by providing more timely and accurate information to executives."

Sarbox Impact Trumped by Competitive Pressures

Despite the major changes brought on by Sarbox, revenue recognition policies are being impacted to an even greater degree by business model changes. When asked to identify the primary factor impacting revenue recognition policies, respondents from public companies ranked Sarbox a distant third:

• 24% Business model changes
• 17% SAB 101/104
• 14% SOP 97-1/98-9
• 14% Sarbanes-Oxley

Sarbox requires companies to document and certify their reporting processes. As a result, many companies have been reviewing their revenue policies to ensure the reported numbers are accurate. But the continual demand for innovation from the market has a more direct impact—new business models typically require new revenue accounting policies.

"The results from this survey show that revenue policies are undergoing a great deal of change," said Gottfried Sehringer Executive Editor of RevenueRecognition.com. "Competitive and regulatory forces are cutting across industries. More and more companies are finding that their current revenue recognition policies are not sufficient. Even private companies are facing new levels of due diligence on revenue for raising capital and M&A activity."

The survey was conducted during August 2005. In all, 400 high-ranking finance officials, including CFOs, controllers, and senior finance and compliance officers were surveyed.

To download the full report, click here.