Regulation

Revenue Recognition Flub Delays Comverse Financials

The company runs afoul of the AICPA’s position on the accounting for software revenue.
Stephen TaubNovember 5, 2007

Comverse Technology said that contrary to previously stated expectations, revenue recognition issues will prevent it from becoming current in its financial reports by the end of its fiscal year ending January 31, 2008. It also said financial statements for three fiscal quarters that ended in 2007 should no longer be relied upon.

The software company explained that it found errors in the application of Statement of Position 97-2, Software Revenue Recognition, issued by the American Institute of Certified Public Accountants. But it added that any resulting accounting errors are expected to affect only the timing of revenue recognition and not the validity of the underlying transactions or revenue.

CEO Andre Dahan said the review arose in the external audit of Comverse’s fiscal 2006 statement and is not associated with investigations into the timing of the company’s stock-option grants, which it said are “substantially complete.”

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According to the CPA Journal, SOP 97-2 generally applies to all entities that license, sell, lease, or market computer software. It also applies to “hosting” arrangements in which the customer has the option to take possession of the software. The publication explained that hosting arrangements occur when end users do not take possession of software but rather it resides on the vendor’s or a third party’s hardware, and the customer accesses and uses the software on an as-needed basis over the Internet or some other connection.

”It does not apply to revenue earned on products containing software incidental to the product as a whole or to hosting arrangements that do not give the customer the option of taking possession of the software,” the CPA Journal said.

SOP 97-2 provides that revenue should be recognized in accordance with contract accounting when the arrangement requires significant production, modification, or customization of the software, according to the journal. It added that when the arrangement does not entail such requirements, revenue should be recognized when persuasive evidence of an agreement exists, delivery has occurred, the vendor’s price is fixed or determinable, and collectibility is probable.

William Sorin, the former general counsel of Comverse, in May became the first executive involved in the company’s stock-option backdating scandal to be sentenced to prison. Last year, former CFO David Kreinberg pleaded guilty to securities fraud and conspiracy to commit securities fraud, mail fraud, and wire fraud.

Former CEO Jacob “Kobi” Alexander was charged with conspiracy, securities fraud, making false filings with the SEC, mail fraud, wire fraud, money laundering, and engaging in unlawful monetary transactions. He fled the country last year, and the U.S. government is seeking his extradition.