Revenue Recognition is Coming: Following the Progress at MarketWatch
After the enormous success of our coverage of non-GAAP metrics at MarketWatch, my bosses asked what was coming next –something we could focus on and provide unique insight for our active investor audience.
Susan B. Anders, PhD, CPA/CGMA and the Louis J. and Ramona Rodriguez Distinguished Professor of Accounting at Midwestern State University, Wichita Falls, Texas (and a member of The CPA Journal Editorial Board) put together a great recap of the writing and action, or rather inaction, of standard-setters on non-GAAP metrics for the New York State Society of CPAS. It was very nice of her to feature my writing, and speaking, on the subject on this blog and at MarketWatch.
Francine McKenna’s pre-MarketWatch blog, re: The Auditors (https://francinemckenna.com), offers access to a print version of her remarks on non-GAAP metrics at the New York University Forum in November 2016 (http://bit.ly/2tjGaTI). McKenna discusses some of the problems with non-GAAP reporting from her perspective as a journalist and accountant, concluding with some difficulties in requiring non-GAAP numbers to be audited. The blog also offers “The SEC on Non-GAAP Metrics: A Collection of Writing at MarketWatch,” which provides summaries and links to the original posts (http://bit.ly/2udELQ0). An August 2016 post on MarketWatch reports “How the Biggest Companies in the S&P 500 Use Made-up Earnings Numbers,” including an embedded table of the 50 largest companies’ GAAP versus non-GAAP earnings per share numbers and links to related articles (http://on.mktw.net/2uDyf7C).
I am still writing about non-GAAP metrics when something new comes up.
July 5: SEC tells companies to be careful how they talk about free cash flow
August 21: Target revises reporting, after SEC calls out non-GAAP gross margin
September 5: The company that makes Jack Daniel’s is skirting accounting rules, experts say
So what’s next?
So, once I returned from my Stigler Center fellowship I got to work catching up on the new standard, talking to experts everywhere and working with Olga Usvyatsky at Audit Analytics to come up with the data to support stories–by me and my colleagues–about companies and their response to the new standard.My goal was to pick some of the obscure topics that were unique or focused on a specific industry.
My first one was about gift card breakage in retail:
June 28: An obscure accounting change could boost Amazon, Starbucks, Wal-Mart profits by hundreds of millions of dollars
The second was about non-lending income at banks and investment banks:
July 8: Banks are beginning to admit a new rule on revenue recognition will have an impact
Then, in case anyone still didn’t get the message:
July 17: A revenue rule change is coming and every company will be affected
My colleague Jeremy Owens in San Francisco wanted to write about Microsoft, so we did this one and later one more:
Microsoft earnings: Massive changes are ahead from job cuts to accounting change
Microsoft joins Facebook and Alphabet in move to GAAP reporting
Microsoft Corp. MSFT, +0.11% announced on a conference call Thursday afternoon that it will move to all GAAP reporting in its new fiscal year, a move that fellow tech giants like Facebook Inc. FB, +0.44% and Alphabet Inc. GOOGL, -0.13% GOOG, -0.24% have also made recently. Microsoft conducted the conference call to go over the changes to its financial reporting that will result from new revenue-recognition rules, which Microsoft is adopting earlier than most companies. The Securities and Exchange Commission has been cracking down on companies’ use of non-GAAP earnings, and tech companies appear to be moving away from those metrics, which typically strip out stock-based compensation and other effects to present healthier profit numbers. Microsoft also restated financial performance for the 2017 and 2016 fiscal years with the changes that the new revenue-recognition rules will bring in order for easier comparisons.
On July 26 I decided to take a look at who was helping companies do this work, since there was a fairly large number, about 23, that were early adopting the new standard. (The general due date is annual reporting periods (including interim periods therein) beginning after December 15, 2017.)
New revenue rules mean more work for companies, big revenue for consultants and auditors
How are companies getting the job done? A survey from global accounting firm PwC at the end of 2016 says companies are primarily leveraging internal resources. But when the going gets tough, and time constrained, finding the right resources and enough of them will be even tougher. “As the effective date gets closer, this situation may become more acute and available outside assistance may be limited. Time will tell,” wrote PwC.
A recent webcast hosted by PwC gave some insight. Alphabet Inc. GOOGL, -0.08% GOOG, -0.21% an early adopter, and Lockheed Martin Corp. LMT, +0.01% said they reached out to PwC for help. Both are audited by EY.
My impression is that the initiatives look a lot like the early days of Sarbanes-Oxley 404 implementation–the auditors help as much as they can until someone tells them it’s a conflict of interest. In the early days of SOx, auditors went crazy doign everything, but then regulators eventually throttled their enthusiasm, and windfall, telling them they were prohibited from supporting audit clients with management’s design, documentation, and testing of internal controls over financial reporting.
Thus emerged the huge business opportunity for independent firms like Protiviti and staffing firms to do the work so the auditors could independently and objectively to provide their opinion later.
If any firm has been providing revenue recognition implementation services that might violate auditor independence rules, it would be apparent, at this point, primarily for companies that early adopted. Unless the company was an early adopter as of the beginning of 2017, I would expect to see any specifically identified additional fees in the “other” category, not “audit” and “audit related” categories in proxies, since the support the firm may have given was not for the current year audit.
MarketWatch reviewed a sample of 2016 proxy filings, with the assistance of research firm Calcbench, to identify companies that explicitly identified adoption of the new revenue recognition standard as an explanation for additional service fees from their auditor.
In addition to Ford, a quick scan found 10 more companies that used their Big 4 auditor—Deloitte, KPMG, PwC, or EY—for additional services to support preparation for adoption of the new revenue recognition standard by name. The additional fees were found in audit, audit related and other services as of the end of 2016. Except for early adopters like Ford and Workday Inc. WDAY, -0.36% which were done with their effort by January 2017, those services were not required for the 2016 audit opinion.
I went to an expert, former Chef Accountant for the SEC Division of Enforcement Howard Scheck, to see if what I was seeing should give prompt the SEC and PCAOB to look more deeply:
“While some audit committees preclude any consulting services by their auditor,” said Scheck, “a certain level of consulting by an auditor for this kind of implementation would seem to be undertaken frequently and would not, in my view, pose an independence concern.
But if an audit firm performs consulting work for an audit client, where it would later have to audit its own work, then it raises an auditor independence question,” said Scheck.
We’ve written quite a few more articles on the subject and for now have the subject all to ourselves. Major media has not yet picked up on the news. I will detail more articles in a future post or you can look for me at MarketWatch.