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Sarbanes-Oxley Impacts Revenue Recognition Polices

Originally published October 26, 2005

One of the primary goals of the Sarbanes-Oxley Act is to ensure that companies are reporting accurate revenue numbers. Consequently, revenue recognition policies have been under particular scrutiny. A new survey of 400 public and private companies found that more than half (55%) of all public companies have changed revenue recognition policies as a result of Sarbox, and that many of these changes were moderate to significant. In addition, revenue recognition was identified as one of the top three ongoing control risks and remediation challenges.

The survey found compliance processes are in need of additional investment. Only 14% of public companies rated their compliance processes highly efficient. 58% said their compliance processes may require additional investment, and 24% said additional investment is required. 4% said the processes were largely temporary fixes and will be replaced entirely.

The top three ongoing control risk or remediation challenges are workflow and approval process, eliminating spreadsheets, and revenue recognition. Approval processes are the source of executive liability and therefore a major issue. The pervasiveness of spreadsheets and the specialty calculations they perform are making them difficult to replace. But susceptibility to errors and resistance to documentation makes them a major source of risk. Revenue recognition is becoming far more complex as a result of the combined effect of regulation and business model innovation.

These compliance processes and others are targeted for technology investments in 2005. In many cases they are inter-dependent. As a result, 77% of companies evaluating compliance technology are considering solutions for two or more processes.

Sarbox requires companies to document and certify their reporting processes. As a result, many companies have been reviewing their revenue policies to ensure the reported numbers are accurate. But the continual demand for innovation from the market has a more direct impact-new business models typically require new revenue accounting policies.

The results from this survey show that revenue policies are undergoing a great deal of change, said Gottfried Sehringer Executive Editor of RevenueRecognition.com. Competitive and regulatory forces are cutting across industries. More and more companies are finding that their current revenue recognition policies are not sufficient. Even private companies are facing new levels of due diligence on revenue for raising capital and M&A activity.

This BeyeNETWORK news item contains information from a recent press release by the company mentioned.