The Securities and Exchange Commission sanctioned a Scottsdale, Arizona-based software company for having inadequate internal accounting controls over its financial reporting, causing misstated revenues in public filings for four years.
The SEC said its investigation found that JDA Software Group Inc. didn’t properly recognize and report revenue from some software licenses it sold to customers because” its internal accounting controls failed to consider information needed for determining a critical component of revenue recognition for software companies.”
JDA agreed to settle the SEC’s charges by paying a $750,000 penalty.
The SEC said,
If companies are unable to demonstrate this component — known as vendor specific objective evidence of fair value (VSOE) — when determining the fair value of certain services related to a software license agreement, then they cannot immediately recognize the entire revenue from that agreement.
Proper internal controls would have recognized revenue from the sales over the term of a services agreement, the SEC said.
Michael Maloney, Chief Accountant of the SEC’s Enforcement Division, said: “Companies must have adequate internal accounting controls designed to comply with their financial reporting obligations to the public.”
The SEC settled the case by an administrative order and didn’t go to court. The order is here (pdf).
The order identified two specific deficiencies in JDA’s internal accounting controls:
JDA lacked adequate revenue recognition policies and procedures and failed to identify all service-related contracts needed for VSOE testing to determine the fair value of certain services.
JDA didn’t have sufficient internal accounting controls to determine whether a software license agreement and related services contract were linked to each other.
Because of the internal control failures, some of JDA’s financial statements for 2008, 2009, 2010, and 2011 were materially misstated, the SEC said.
JDA restated the financial statements in August 2012.
It had overstated its revenue for fiscal year 2010 by 4 percent and overstated EBITDA by approximately 18 percent, the SEC said.
Richard L. Cassin is the publisher and editor of the FCPA Blog. He can be contacted here.