Local accounting regulatory bodies say it is unlikely they would undertake a sweeping review of practices among IT companies despite a growing international trend of “accounting irregularities” in the sector and a case involving an Auckland-based company.
The bodies say the local environment lacks the regulatory strength of offshore markets, with scope only to be reactive to individual cases.
Nevertheless, Accounting Standards Review Board chairman John Hagen planned to raise the sector’s problems at a board meeting late last week and the Institute of Chartered Accountants (ICA) says it has working parties looking at related issues.
A rash of recent accounting problems at big-name US stock exchange-listed companies like Lucent, Xerox and Lernout & Hauspie’s has caused analysts to put technology companies on watch. Institutional investors and funds managers say they are wary more cases of improper accounting practices may emerge in coming months as companies struggle to hit profit and growth targets.
In Australia, the Australian Securities and Investments Commission (ASIC) last month wrote to 53 technology companies, most of which are listed on the stock exchange there, requesting clarification of their reporting and disclosures, with plans to take regulatory action and enforcement where necessary.
This month, Auckland-based Brocker Technology Group, listed on both the Nasdaq and the Toronto exchanges, revealed it had found irregularities in the accounts of its Australian operations, fired its local head and appointed PricewaterhouseCoopers to review both the local operation and the group’s accounts, due to be completed in a week’s time.
Brocker’s Australian arm had forward-booked sales invoices to the group’s bank, which had led to an over-statement of net income by an estimated $C4.5 million.
Brocker volunteered information about the irregularities to the Nasdaq, but the exchange has halted trading of Brocker’s shares while the investigation continues.
In New Zealand, responsibility for accounting standards, regulations and enforcement is spread amongst several bodies, all of whom say they don’t have a brief like ASIC enabling them to take a proactive stance. Several point out the small number of publicly held IT companies here, while the Securities Commission says such investigations are not its domain.
But in the last year the Companies Office has beefed up its investigation arm, prosecuting infringements of the Financial Reporting, Companies, Securities and Insolvency Acts by both listed and unlisted local companies.
Companies Office national enforcement unit boss Shane Keohane says while it has not yet received any complaints about an IT company’s reporting, “if a company did not comply and was bought to our attention, we would act [to determine its intention].”
The IT issue is another sign of the country’s unwillingness to adopt strong enforcement practices says Clendon Feeney lawyer Craig Horrocks. He says under the current regime problems such as Brocker’s would usually go unnoticed, but are shown up under stricter US laws where quarterly statements are required and enforcement and class action suits common.
Horrocks and other local lawyers spoken to say most IT accounting irregularities deal with revenue recognition for multi-part, multi-object or ongoing contracts. This is considered a “grey area” of law with much debate about when and how revenues should be recorded. Forward booking of sales and early claims for future contracts, like in Brocker’s case, are common, as is “channel stuffing”, or pushing inventory out to dealers to get it off the books and effectively financing dealers while inflating year-end sales.
At least one US vendor, Computer Associates, has just changed its revenue recognition reporting to more evenly spread long-term contract revenues out. But its local arm is still in a confusing position of reporting both to GAP standards and local standards (see CA reforms hit profits).
ICA hopes to have a draft for intangible standards over the next couple of years but sees revenue recognition – both issues which cover all industries but especially effect the IT industry - as a much more complex problem internationally, says policy director April MacKenzie.