What a Tangled Web.

• Author: Malloy, Patrick

The technology revolution is here and is transforming the way business is transacted. The accounting profession is not immune from this transformation. One of the most challenging areas that practitioners face is assisting Web-based companies. According to the AICPA's top-ten list of technology concerns, the top technical issues for accounting, auditing, and assurance services that practitioners will face in the future are: security and controls, e-commerce, auditing electronic evidence, and the training and technological competency of auditing staff. Even small practitioners will have to become familiar with procedures and programs for auditing transactions and testing internal controls, through the computer, rather than around the computer. The concerns of practitioners with clients that are Web-based companies are many. Four main concerns include Web site valuation, Web site costs, going-concern issues, and security of Web-based transactions.

Web site valuations

Web site valuations have completely broken all ties with past valuation assumptions. Web-based companies are not valued on net earnings, capitalization, or net tangible assets. The only component taken into consideration is revenues (if applicable) or potential loss of revenues. Web sites can be valued as high as 50 times revenues, even though the company may have consistent losses, negative cash flow from operations, negative net worth, and few tangible assets.

The main reason for this form of valuation is the unique factors a Web site offers: instant globalization, a broader spectrum of consumers, and the fact that consumers feel a closer and quicker communication link with the company. A properly developed and user-friendly site is more of an attraction than traditional window shopping (and physically less exhaustive). "Surfers" are drawn by interaction and eye-catching "bells and whistles"; they will spend more time and money at sites that catch their attention. The biggest advantage to developing a versatile site is that one site can handle multiple, diverse inquiries at one time, unlike a store employee. In addition, the development of a Web site can be a cost-effective approach to expanding a business and may also help a company realize cost-efficiencies in other areas (for example, distribution, warehousing, selling expenses, and location of facilities). The ability to expand business is phenomenal, as is the return on investment. It is not unusual for a $200,000...