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Revenue Recognition Puts Cadence Off the Beat

Software company, which announced major executive changes this month, is probing how errors occurred.
Roy Harris and Stephen TaubOctober 23, 2008

Cadence Design Systems Inc. is restating its financial restatements for the first two quarters of 2008 to correct $24 million in revenue recognition errors. It is also reviewing how customer contracts signed during the first quarter were recognized instead over the duration of the contracts, beginning with the second quarter.

The microchip-design software maker said that it had launched the review after preliminarily determining, during its regular review of its third quarter results, that the recognition had occurred during the later quarters.

As a result of the restatement, the company warned, it will delay the release of its third quarter result until it is “practicable.”

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The Wall Street Journal account of the Cadence announcement noted that on the same day that the company had planned to release its third-quarter results, Oct. 15, it announced the resignation “by mutual agreement” of William Porter, executive vice president and chief administrative officer, who had also served as CFO between 1999 and last April. Four other executive also resigned at the same time, and the company said it was forming an interim office of the chief executive.

In that interim office was Kevin S. Palatnik, the former controller, who was named CFO in April. Named as interim executive chairman was John B. Shoven, the company’s board chairman. Other members of the office were Cadence director Lip-Bu Tan and Cadence senior vice president, business development, Charlie Huang.

In response to a call from CFO.com, Nancy Szymanski, director of corporate public relations for Cadence, said that the announcement of the restatement issues was not related to the announcement of the departure of the executives in mid-October. Rather, the latest announcement “was a result of our third quarter results review, as stated in the press release,” she said.

Cadence is hardly the only software maker to get snagged by revenue recognition issues. And although it seems too early to say if there’s any relation between the current company issues and broader industry problems, software makers have been struggling with the accounting rules for years over the booking of sales.

Indeed, as global accounting standards move toward a common set of rules, experts have expected the issue to become even thornier for many CFOs. Back in July, for example, PricewaterhouseCoopers warned software companies with complex sales-contract structures they could have trouble wrestling with International Financial Reporting Standards.

“The biggest accounting challenge that we see for software companies is revenue recognition,” Dean Petracca, PwC’s global and U.S. software leader, told CFO.com in an interview.

Kate Plourd contributed to this article.

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