The Securities and Exchange Commission has sanctioned an Arizona-based software company for having inadequate internal accounting controls that resulted in misstated revenues in public filings. JDA Software Group agreed to settle the charges by paying a $750,000 fine.
An SEC investigation found that the company failed to properly recognize and report revenue from certain software license agreements it sold to customers because its internal accounting controls failed to consider information needed for determining a critical component of revenue recognition for software companies. If companies are unable to demonstrate this component – known as vendor specific objective evidence of fair value (VSOE) – when determining the fair value of certain services related to a software license agreement, then they cannot immediately recognize the entire revenue from that agreement.
According to the SEC’s order instituting a settled administrative proceeding, JDA lacked adequate revenue recognition policies and procedures and failed to identify all service-related contracts needed for VSOE testing to determine the fair value of certain services. It also failed to have sufficient internal accounting controls to determine whether a software license agreement and related services contract were linked to each other. As a result of these internal control failures, some of JDA’s financial statements for 2008, 2009, 2010, and 2011 were materially misstated. JDA restated those financial statements in August 2012.