Charting a Course: Revenue Recognition Practices for Today’s Business Environment

Regulators and the plaintiff’s bar have frequently been critical of issuer revenue recognition practices. Typically, after negative earnings reports or announcements of financial restatements, regulators and private plaintiffs, employing the benefits of hindsight, evaluate issuers’ financial statements and disclosures in a search for indicia of actionable financial fraud, including “managed earnings.” The economic forces of the early 1990s generated pressures that led to numerous examples of overaggressive revenue recognition practices, often met by swift and typically stiff regulatory responses. As corporate America approaches the end of fiscal year 2008, the needle on the economic compass again points to difficult economic times. And with it, a pause for a thoughtful look at revenue recognition policies and practices—by financial reporting professionals, audit committees that oversee their work, and executives that sign Sarbanes-Oxley Act certifications—is warranted.