Cash Flow

Diebold’s “Bill and Hold” Probe Widens

Now the Department of Justice wants to know more about the voting machine company's revenue recognition practice.
Stephen TaubDecember 26, 2007

Diebold Inc. said the Justice Department has become the latest government agency to launch an investigation into accounting practices. In early October, the maker of automated-teller machines, security systems, and voting machines warned it may restate its financial statements for the year ended December 2006 and the first quarter of 2007 after it completes an in-depth analysis of its revenue recognition practices.

Company officials said at the time that Diebold was in discussions with the Office of the Chief Accountant of the Securities and Exchange Commission regarding its prior practice of recognizing revenue on a “bill and hold” basis. Bill and hold is a practice in which the seller bills customers for products, but doesn’t ship the products until later. At the center of the controversy is the ownership status of a product and the timing of recognizing revenue. Specifically, when does ownership of a product contractually passes to a customer. Diebold said it is discussing with the SEC the most appropriate revenue recognition method to replace its bill and hold practice and will disclose the new method once it has received sufficient guidance.

The company also said an internal review of these issues will be completed in the first quarter of 2008. It will then include any material adjustments identified as a result of this review in amendments to its financial statements.

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Diebold also assured investors that it continues to cooperate with the SEC, and will cooperate with the Department of Justice if requested. “This change in the company’s bill and hold revenue recognition practice would only affect the timing of recognition of certain revenue,” the company noted in a press release. “Diebold does not anticipate that the change in the timing of revenue recognition would impact previously reported cash provided by operating activities or the company’s net cash position.”

In May 2006, Diebold disclosed in a regulatory filing that the SEC had launched an informal inquiry into the company’s revenue-recognition practices. At the time, news reports confirmed that company spokesman Mike Jacobsen said that the inquiry was related to two occasions during which the company restated revenue. Both situations seem to involve the company’s voting-machine operations, although the probe covers all Diebold business.

Jacobsen elaborated that Diebold shipped voting machines in Ohio in the second quarter of 2005, but then revised its reports to record the revenue in the third quarter. Diebold made the change, he reportedly added, because memory cards for the voting devices were not sent until July.

He told the Associated Press at the time that the other change were linked to how the company reported revenue from service contracts for electronic-voting systems. In March, the company disclosed that $7 million in fourth-quarter 2005 election systems revenue and $4.2 million in net income would need to be recognized in future periods.

In July 2007, Diebold announced it would delay the release of its second-quarter earnings results and a related conference call because of questions the SEC had raised concerning the company’s accounting for bill-and-hold revenue.

Diebold isn’t the first company to get into hot water as a result of using bill-and-hold accounting. While the method may prove beneficial to both buyer and seller, establishing that ownership of the goods transferred can be a sticky problem. Companies like Raytheon, Gateway, and — notoriously — Sunbeam, have run into problems with the practice.