Auditors backtrack on SaaS revenue recognition

Just when SaaS vendors were starting to get their investors and customers comfortable with the recurring revenue model, now their accountants are getting cold feet and changing the way professional services revenue gets recognized.

Just when SaaS vendors were starting to get their investors and customers comfortable with the recurring revenue model, now their accountants are getting cold feet. Fellow Enterprise Irregular Jason Corsello has drawn attention to Taleo's restatement of financials all the way back to 2003, changing the recognition of professional services revenue to spread it across the length of the contract (typically three years in Taleo's case). There is no change to the value of revenue being recognised, merely the timescale over which it is written to the bottom line. Corsello notes how exasperating this must be for Taleo:

Taleo has long stood by their revenue recognition policy ... a policy that has been validated year over year and signed off by Deloitte (their auditors) in the form of the company's 10K and 10Q. Now, those same folks, Deloitte, have chosen to change the rules and raise the accounting flag (did I say they signed off on those financial statements?), which triggered the attention of the 'OCA' (Office of the Chief Accountant of the Securities and Exchange Commission). I wonder how much longer Deloitte will be retained by Taleo?

He notes that the change may well lead many other SaaS vendors into "re-evaluating their accounting and revenue policies." I'd add that it may also accelerate the move we're already seeing towards shorter contract terms, since that would allow vendors to book their implementation revenue earlier. But why haven't auditors and the SEC ever forced on-premise software vendors to take the same approach to implementation services revenues? — especially when there's plenty more evidence of customers suing to recover those costs once they discover the implementation hasn't worked! I wonder what the impact on SAP, Oracle and Accenture's financials would be if they couldn't recognize all their implementation and license fees until the application had been up-and-running for a three-year stretch? Ouch!

You can understand why, having completely failed to notice anything questionable in the books of the financial services industry over the past decade, auditors are now rushing around trying to cover their backsides by locking every other available stable door. But it is irksome to discover that they're doing so by picking on industries that they patently don't understand one iota, rather than doing a better job of policing those industries they understand all too well.

I should add — although you probably already worked this out — that I'm no accountant, so what do I know?

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