The new revenue recognition standard is being converted into a single model across all industries. The new global framework for revenue accounting has numerous challenges for companies including: Application and Controls. Application was described in the previous blog post.
ASC 606 requires new revenue recognition have a significant impact on internal controls. For instance, the new disclosures increase the amount of information being processed– and potentially, the number of people responsible for handling it.
Previously 2002’s Sarbanes-Oxley Act required reporting companies to provide management certification on the state of their internal controls over financial reporting (IFCR). The SEC took actions against companies such as Saba Software, the JDA Software Group, and QGSI who did not comply. The SEC is getting more serious about enforcing regulations. Unsurprisingly, it’s tech companies – traditionally some of the most extensively regulated organizations in the business world – that seem to be bearing the brunt of the SEC’s scrutiny.
More troubling for US businesses: while previous cases involving internal controls typically coupled those charges with other accounting irregularities, the SEC has begun pursuing cases based on controls alone, another significant policy shift with potential repercussions for public companies. This change is part and parcel of the SEC’s new “Broken Windows” policy towards enforcement. To learn more about SEC role read previous blog post
To avoid risk it’s important for companies to ensure they are complying with internal controls. Furthermore, the risks only increase if the company's accounting records lack defined audit trails, or accounting information is not systematized and centralized. This is a common problem in larger organizations, especially ones with a variety of business units.
Proper internal controls are both a systemic and an organizational concern; a well-trained staff is key, but needs to be supported by systems that can provide critical information, minimize unnecessary touches, and limit access to sensitive data.
Companies that rely heavily on sidebar solutions like excel for complex revenue recognition are particularly vulnerable in this regard, creating a situation where simple human error could trigger an audit or restatement. All of these risks only increase if the company's accounting records lack defined audit trails, or accounting information is not systematized and centralized.
Companies should asses their business and internal controls to determine whether or not they can adequately report on the information needed to satisfy the new revenue recognition guidelines. There are a number of steps to achieve internal controls, including obtaining and implementing the right software. A general order and billing software solution would be able to maintain the pricing structure and determine revenues to be recognized from specific transactions.
To learn more about software solutions for revenue recognition subscribe to our blog. Upcoming blog post “Weathering The Storm” will discuss potential solutions for weathering the storm and preparing you for new revenue recognition guidelines.
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