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Accounting News Roundup: Cloud Revenue, Leases and Bank Fraud | 06.06.16

Accounting for cloud revenue

One of things that's been established is that creative accountants get ahead. That is, when someone asks, "What was net income?" the accountant who responds, "Net income was X," gets a "Thanks." The accountant who responds, "What do you want net income to be?" gets a promotion.

This seems to be at the heart of the whistleblower's lawsuit against Oracle, which made news last week. In that case, the whistleblower, Svetlana Blackburn, claims she was let go for not getting creative enough. Or in the words of her lawsuit, "fit square data into round holes."

I imagine Blackburn's superiors believed she should've tried a little harder at fitting square data into round holes. You see, it sounds like legacy software companies like Oracle are looking for accountants who — pardon the pun — excel at creative accounting for their growing cloud software businesses:

Accountants and analysts say that classifying software sales as cloud or traditional remains something of an art.

“There’s some subjectivity in 'is it cloud, is it traditional software?,” said Steve Biskie, an auditor and co-founder of compliance consultancy High Water Advisors.

Like others, he said the most nebulous part of cloud accounting concerns situations where the customer buys a product that can be used partly in the cloud, and partly on its own hardware.

U.S accounting rules state that in cases when use is mixed, companies should allocate the revenue between traditional, or licensed software; and cloud, or hosted software.

“Determining the fair value of the software license and hosting service may require the use of estimates,” the rules say. “Management should consider all relevant information, such as information from the negotiation process with the vendor, in estimating the fair value of the license.”

Again, I think the lesson here is, if you want to succeed in accounting, estimates are your friend.

Lease accounting

Deloitte put out a press release this morning to report that most people aren't ready for the new lease accounting standard:

Just 9.8 percent of more than 5,400 financial and accounting professionals say their companies are prepared to comply with the new Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) lease accounting standards, according to a recent Deloitte poll. Moreover, only 15 percent of respondents expect compliance to be easy.

"If you think your organization may have a tougher time complying with the new lease accounting standards than most, get started developing your implementation roadmap now," says one unhelpful Deloitte guy. 

Accountants behaving badly

Here's a story of Jesse Stewart Ellis, CPA, who got mixed up in a pretty boring fraud thanks to a friend. This unnamed friend and a colleague were employees of Regions Bank and they had Ellis set up a dummy company to accept premium payments from Regions Equipment Financing Corporation ("REFCO"). The whole idea was that Ellis's company would be providing residual value insurance, except he had no experience providing residual value insurance:

Prosecutors charge that Individual #1 and #2 approached Ellis and urged him to establish a company that would enter into an agreement with REFCO to provide residual value insurance. Individuals #1 and #2 then, in their capacities as senior VPs of REFCO hand-picked Ellis' new company – despite it having no experience – to provide the insurance.

Over a five-year period RIFCO paid Ellis' company $5.1 [million] to provide insurance. That is the amount of money prosecutors charge that Individuals #1 and #2 and Ellis then split among themselves by setting up dummy companies to launder the money in hopes of hiding what they were doing.

Despite the painfully dull nature of this fraud, I'm not surprised that it worked for awhile. Insurance is one of those things you forget that you've been paying for until you actually need it. Then it becomes really, really important. I suspect the same is true for banks, although the article doesn't explain how the scam unraveled. Ellis pleaded to bank bribery, wire fraud, money laundering and agreed to forfeit $1.7 million, "hoping to receive a reduced prison sentence."

Previously, on Going Concern…

I wrote about PwC's new partners. And in Open Items, someone: "Left public early: how do I make up for it later on?"

In other news:

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