Financial Accounting Blog

Tuesday, February 03, 2004 Recently, the SEC has sought to put more pressure on U.S. businesses in regards to revenue recognition. The guidelines of accrual basis accounting state that revenue is to be recognized when the transaction that causes it occurs. Apparently, in today's world things are not quite as cut and dry. Therefore, the SEC is urging businesses and their auditors to thoroughly review their revenue recognition policies, and the SEC will likely continue to investigate more cases of potential fraud and tighten policies on revenue recognition that prevent missappropriations such as "premature revenues" from being recorded.
"If you have a revenue-recognition policy, then we want to know what are the things that made you decide" the policy. "We are asking for additional disclosures," Taub added. SEC executives, including Taub, said lack of clarity on recognizing what is revenue and what is not still remained a "major deficiency" among several Fortune 500 companies.

Carol Stacey, chief accountant in the SEC's corporate finance division, said the regulators will scrutinize carefully companies' accounting policy descriptions. "We would like to know whether the company has described explicit or implicit conditions, contingencies, or circumstances that would impact the timing and amount of revenue recognized," Stacey said. "Are the sources you've identified consistent with those you talk about in your business section discussion?"

The SEC also urged auditors to be more thorough while going through companies' internal control systems. Rather than just certifying whether a company's internal control system is right or wrong, the SEC wants accounting firms to evaluate and analyze them.