Technically, VSOE is not a four letter word: it’s just an acronym for "Vendor-Specific Objective Evidence", an element in software revenue recognition. Try telling that to the revenue managers and many of the CFOs who’ve had to deal with it. According to a feature article in the January 08 edition of CFO Magazine, "Why VSOE Spells Trouble", VSOE is not just a contentious, convoluted method for determining the market value of certain items, but often the cause of companies coming to genuine grief. Witness the case that served as springboard for the CFO piece: Japanese giant NEC was repeatedly unable to meet the requirements of VSOE and forced eventually to accept delisting from Nasdaq. Further, NEC had to admit publicly that its financial statements for the past six years were not reliable, and retreat to Japanese accounting standards. This occurred apparently despite the fact that its Tokyo-based accounting staff was completely immersed in US GAAP.

NEC is far from the only company mired in this predicament. Revenue recognition mistreatments and mistakes in general are acknowledged to be the leading cause of financial restatements, and VSOE issues are the most likely culprits. VSOE is probably the most difficult of all revenue accounting rules to apply, and the guidance is often so ambiguous that even auditors disagree. Yet, as software becomes an integral part of more products and services -- and more than just "incidental" to those products — companies from other industries are finding themselves drawn inexorably into the VSOE vortex for the purposes of revenue recognition accounting.