Revenue recognition: a perennial problem; Concerns about revenue recognition have intensified, and Financial Executives Research Foundation looks at some current developments affecting FASB's ongoing project--which aims to develop guidance that would apply to both public and private businesses.

• Author: de Mesa Graziano, Cheryl
• Position: Revenue recognition

It's back. With most companies having completed their first internal control attestation--and thus, with less demanding focus on Sarbanes-Oxley Section 404 (at least in the short run)--attention for many is shifting to revenue recognition. The topic is still a main priority for standard-setters and regulators, as well as for financial statement preparers and users.

Earlier this year, FEI President and CEO Colleen Cunningham identified revenue recognition as number three in the top 10 financial reporting issues for 2005. Similarly, an October 2004 survey of the Financial Accounting Standards Advisory Council (FASAC) identified revenue recognition by 21 FASAC members and five of the seven members of the Financial Accounting Standards Board (FASB) as the FASB's top priority.

Also, in the April 2005 issue of Financial Executive, Linda Thomsen, then deputy enforcement director (and now director of enforcement) at the Securities and Exchange Commission (SEC), identified revenue recognition as a "classic" accounting issue that will repeat itself and even morph, depending on the circumstances.

With the preponderence of SEC litigation stemming from revenue recognition issues, some recent actions are worth noting:

* On March 15, after seven other legal actions taken over the past two years, the SEC charged the former co-chairman and CEO of Qwest Communications International Inc. and eight other former Qwest officers and employees with fraud and other violations of the federal securities laws. In SEC filings and other public statements, three of these individuals fraudulently characterized nonrecurring revenue from one-time sales as recurring data and Internet service revenues. The release notes that Qwest's dependence on these transactions to fill the gap between actual and projected revenue was likened internally to an addiction.

* On March 23, the SEC filed a complaint against three former senior officers of iGo Corp., alleging that the defendants collectively caused iGo to improperly recognize revenue on consignment sales and products that were not shipped or that were shipped after the end of a fiscal quarter.

* On April 27, the SEC filed a complaint against the former CEO and chairman of Homestore Inc. and its former executive vice president of business development, alleging that they engaged in a fraudulent scheme to overstate advertising and subscription revenues. The scheme involved a complex structure of "round-trip" transactions using various third-party companies that, in essence, allowed Homestore to recognize its own cash as revenue.

Though the cases cited involved fraud and irregularity, not all revenue recognition errors are intentional. For example, in April, American Home Mortgage Investment Corp. announced that revenue recognized from its fourth-quarter 2004 loan securitization would be reversed, and recognized in the first quarter of 2005. As a result, American Home restated its financial results for 2004. And Huron Consulting Group...