The perils of revenue recognition: there are few more troublesome areas in accounting. Recent actions against companies like Computer Associates and Lucent Technologies point out the continuing opportunities for fudging or outright fraud.

• Author: Marshall, Jeffrey

"Revenue usually is the largest single item in financial statements, and issues involving revenue recognition are among the most important and difficult that standard-setters and accountants face." --From an FASB project update Sanjay Kumar may be the poster child for the results of improper revenue recognition. The young and, by all accounts, highly capable chief executive of Computer Associates was stripped of his title in the wake of a massive accounting fraud, tied to revenue recognition, at the Long Island-based software giant. Kumar briefly took a post as "chief software architect," without any day-to-day responsibilities, but resigned in early June.

According to authorities, Computer Associates backdated software contracts for years to artificially inflate quarterly profits. Now being run by an interim CEO, the company this spring restated a whopping $2.2 billion in revenue from fiscal 2000 and 2001 that it admitted had been improperly booked (see sidebar). Several executives, including former CFO Ira Zar, have pled guilty to securities fraud charges and face prison terms.

The fallout from the CA scandal has sparked its share of headlines, but CA has had plenty of company in recent months:

* Lucent Technologies. The troubled telecom equipment maker agreed to pay a $25 million civil penalty in March; in May, the Securities and Exchange Commission charged nine current and former employees with securities fraud. They were accused of aiding Lucent in improperly recognizing sales of $1.15 billion in pretax income in fiscal 2000.

The SEC has accused the former employees of falsely inflating its revenues through aggressive sales practices, including the filing of false documents on sales to Winstar Communications, which later went bankrupt. Other players in the battered telecom industry, including Global Crossing Ltd. and Qwest Communications International, are being investigated for improperly boosting revenues.

* Tyco International, whose former CEO and CFO spent months on trial on charges that they looted the company of $600 million, has been under investigation by the SEC for the way it previously booked "connection" fees for its ADT Security unit. The practice, since discontinued, involved payments to dealers. ADT had paid them $800 for each contract, authorities said, then increased that to $1,000, but earmarked the extra $200 as a "connection fee." Tyco then booked the full $1,000 as a capital expense, while the $200 was booked as immediate profit.

* PepsiCo Inc. announced in early May that the SEC was considering legal action against its beverage and snack units for allegedly helping struggling Kmart Holding Corp. pump up its revenues in 2001. According to the SEC, a Pepsi employee signed documents that allowed the retailer to improperly record the timing of $3 million...