Early Auditor Input Avoids Nasty Revenue Recognition Surprises

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By Laura Tieger Salisbury

Companies need to involve their independent auditors when they first interpret and apply the new revenue recognition rule to their customer contracts.

“Bad news from your auditor is like fish that doesn’t get better with time,” said Randy Rasmussen, vice president, controller of Medidata Solutions, Inc.,in explaining the need for early auditor involvement.

“So if your auditor is going to tell you something very different from what you think, you want to know it sooner than later,” Rasmussen said during a Deloitte/Bloomberg BNA revenue recognition conference May 8.

The Securities and Exchange Commission has advised companies not to rely on their auditors to interpret the standard—ASC 606—for them.

Rasmussen, whose company is a leading global provider of cloud-based software solutions for clinical research in life sciences, said he understood the SEC rule to mean that companies had to do the initial work before asking for auditor feedback on the company’s initial interpretation.

John Hollister, Silicon Labs’ chief financial officer and senior vice president of Silicon Labs—a worldwide semiconductor company—said his company develops preliminary views before involving the auditors.

Expect Debates

Hollister said his policy is to ensure auditor alignment on most points before heading into the audit committee. He said that he expected a debate with his auditor over how Silicon labs would determine transaction price of contracts, where the amount of compensation the company ultimately receives could change depending on different performance outcomes.

The contract price of more complicated contracts often isn’t certain—the contract price is affected by variables such as price concessions, bonuses or anything that the company has to predict. Hollister advised clearly documenting conversations with the auditor even if areas of disagreement remain unresolved. Amy Holcomb, Deloitte & Touche LLP’s audit managing director, said she found that as the “level of judgment increases, the level of documentation also increases.”

David Samuels, Drfirst Inc.'s chief financial officer, said that his company consults all the stakeholders in the company—sales, operational and legal to make sure that they are aligned before presenting the information to the auditor.

To contact the reporter on this story: Laura Tieger Salisbury in Washington at LSalisbury@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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