Soon after completing his college degree Nick was hired in the accounting department as a junior auditor for his aunt’s software company, O’Brian Software. His aunt Amelia holds the CEO position but does not have enough accounting knowledge of the company. The started as a small family firm and then went public.
Going over financial statements and reviewing the company’s software revenue data, Nick noticed that revenue estimates were too conservative compare to the actual company revenues. He considered a possible case of reserves to inflate earnings in slow earning periods. This could mislead investors and create a negative financial reputation situation that ...view middle of the document...
Aunt Amelia can be held reliable of any company financial statement distortion, and simply using the excuse of not having the accounting knowledge won’t not free her of the responsibility of keeping the reports in compliance.
The final question is if Aunt Amelia should report the presumed revenue recognition issues to the audit committee or not.
Standards and practices
Before moving forward Nick should research and review the software revenue recognition standards. As stated by Statement of Position 97-2 Software Revenue Recognition, revenue is realized and earned when all of the following criteria are met: Persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the vendor’s fee is fixed or determinable, and collectability is probable (FASB, 2013).
Audit committees are part of the company board of directors. They must be composed of independent directors with no personal, financial, or family ties to management. They act to protect investor interests overseeing, financial reporting, audit activities, and compliance with applicable laws, regulations, and the company ethical standards, assuring integrity of financial reports. The board is ultimately accountable to investors for the company’s performance, affairs, and business. The audit committees are responsible to hire expertise in the areas of financial reporting, internal controls, risk management, and audit activities. Management is responsible to communicate with the audit committee about the areas that may cause any financial risk to prevent or detect any financial misstatement (Rezaee, 2009) .
Nick will need to interpret revenue recognition for a software company because quite few factors need to be analyzed. Revenue can be accounted on signed contract. If the vendor operates without relying on a signed contracts to document the revenues and liabilities they should provide other forms of evidence to document the transaction. For revenue recognition base on
Delivery, it can be applies when the customer takes possession of the software or download the electronic copy.
Referring to aunt Amelia lack...