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Could Autonomy Mess Spur Accounting Overhaul?

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Mike Fuentes | Bloomberg | Getty Images

The scandal at Autonomy, a UKsoftware group bought last year by Hewlett-Packard ,has some accountants wondering about the wisdom of new, globalstandards in the pipeline that would change how companiesaccount for revenue.

"Revenue recognition" is the most common type of corporatebook-cooking. The Autonomy scandal, though still murky,allegedly involves a great deal of overstated revenue, or howmuch money was coming into the company from customers.

That allegation has been leveled by HP, which said lastmonth it overpaid for Autonomy and accused it of "seriousaccounting improprieties." Autonomy has rejected suchallegations and said HP is looking for "scapegoats."

The dispute comes as accounting standard setters grapplewith new standards for recognizing revenue. Some accountantsfear these standards, set for completion by mid-2013, could meana step backward in fighting accounting abuses.

The goal of the new, global approach is ambitious. Ifcompleted as planned, the standards would for the first time putcompanies in the United States and in more than 100 othercountries under the same revenue accounting rules. Inconsistencyon this is widespread now and often a source of disagreements.

But critics said the new standards would discard decades ofdetailed U.S. accounting rules in favor of broader,principles-based international norms. That, they said, would bea mistake.

"The U.S. system was replete with details, replete withexamples, and replete with precedent," said Tom Selling, authorof the Accounting Onion blog.

Throwing away that level of detail would give corporatemanagers more room to manipulate revenues and profits, he said.

FASB-IASB Effort

One of the most far-reaching accounting changes in decades,the new revenue standard is a combined effort of the U.S.Financial Accounting Standards Board (FASB) and the London-basedInternational Accounting Standards Board (IASB).

FASB manages the U.S. play book for accountants, known asthe Generally Accepted Accounting Principles, or GAAP. IASB setsInternational Financial Reporting Standards, or IFRS, which isused in more than 100 countries, but not the United States.

For a decade now, the global accounting profession has beenworking on merging IFRS and GAAP, but it has been a tortuousprocess, with U.S. accountants often resisting change.

Some leading accounting groups are losing patience. TheLondon-based Institute of Chartered Accountants in England andWales (ICAEW) on Tuesday called for an end to the "convergence"project. .

The new revenue standards, if implemented as planned, wouldsupplant hundreds of pages of GAAP-style guidance, rules andexamples with broader directives.

One concern is that big companies and auditors would be leftto interpret the new standards on their own, creating "shadowguidance" with little input from investors, said Sandra Peters,head of financial reporting at the CFA Institute.

"Generally, the policies are very generic," said Peters,whose group represents more than 100,000 financial professionalsworldwide. "The issue is, as investors, how will you know whatthe guidance is if it's not in the standard?"

FASB board member Russell Golden said the board is workingout a mechanism to help interpret the standard. There will beenough guidance so it can be applied consistently, he said.

Audits a Concern

Joseph Carcello, accounting professor at the University ofTennessee, said it could be tougher for auditors to push backagainst aggressive accounting if there is no clear rule to citeas having been violated.

Finally, legal experts said it could be harder to prosecutewrongdoers under a principles-based system. Showing a GAAPviolation is often a starting point for a securities lawsuit.

"Principles-based standards will indeed make liability moredifficult to impose and in turn pose greater challenges toplaintiffs, including the Securities and Exchange Commission,"said James Cox, a law professor at Duke University.

U.S. revenue accounting was tightened after scandals atsoftware companies during the 1990s technology bubble. Softwareaccounting is often subject to abuse because booking revenueinvolves a mix of products, maintenance, training and updates.

Autonomy was accused of mixing hardware with higher-marginsales of search software and not properly disclosing the amountsof hardware sales. It was also accused of improperly bookingrevenue to resellers, or middlemen, with no end users.

Autonomy has defended its accounting and said it compliedwith IFRS standards, which left room for interpretation.

The heads of FASB and IASB said last week they doubted majorchanges will be needed to the proposed revenue standards inlight of the scandal at Autonomy.

Supporters said the new standards would simplify ahodgepodge of industry-specific U.S. rules with a general maximsaying that revenue should be booked when goods or services aretransferred to customers.

The detailed U.S. GAAP rules have drawbacks. Companiesintent on hiding their true condition have found ways to complywith the letter of the rules, while still misleading investors,said Bruce Pounder, director of professional programs atSmartPros, a firm that provides education for accountants.

Standard-setters have not set an effective date for the newstandards, but they are not expected to take effect before 2016.