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Software Company Pays Fine to Settle Revenue Reporting Complaint

The SEC settled a complaint with JDA Software Group Inc. for the company’s failure to maintain sound financial reporting controls and properly report its revenue. The SEC faulted the company’s estimates of the value of the services components of its software contracts and its methods for recognizing revenue.

The SEC said on September 25, 2014, that JDA Software Group Inc. of Scottsdale, Arizona, misstated its revenue from 2008-2011 because of weak financial reporting controls.

JDA, which was acquired by private equity firm New Mountain Capital LLC in December 2012, paid a $750,000 penalty to settle the charges. The company didn’t admit or deny its guilt, which is common in many SEC settlements.

The SEC faulted JDA’s estimates of the value of the services components of software contracts and its failure to properly use a method called vendor-specific objective evidence (VSOE), which was established in 1997 in AICPA Statement of Position (SOP) No. 97-2, Software Revenue Recognition, (ASC 985-605-25-45). If the company had the proper controls in place, it would have recognized the revenue over the contract’s life rather than completely at the time of the sale.

“Companies must have adequate internal accounting controls designed to comply with their financial reporting obligations to the public,” said Michael Maloney, the SEC’s Enforcement Division’s chief accountant. “VSOE is a critically important component in determining the timing in which software companies recognize revenue, and JDA’s internal accounting controls surrounding VSOE were inadequate in various ways.”

The SEC order faulted JDA’s financial controls for lacking adequate policies for recognizing revenue and a failure to properly single out the service contracts that had to be tested with the VSOE method. The company’s financial controls also weren’t able to determine if a software license and its services contracts were actually linked.

VSOE requires software companies to measure the revenue from a multi-part customer contract based upon objective criteria about the value of the contract’s components, including the license to use the software, maintenance and upgrade fees, and installation charges, based upon sales of those components as individual pieces. The standard was established in response to a practice in the software industry of rushing customer sales through at the end of a quarter to meet quarterly quotas.

SOP No. 97-2 says software suppliers have to have firm evidence about the value of each component of a contract if the revenue is going to be recognized in that quarter. The accounting requirement was eliminated from U.S. GAAP with the FASB’s recently issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which employs a somewhat more flexible set of criteria for measuring revenue from a multi-part contract.

The amendments won’t be effective until 2017.

The SEC accused JDA of using a flawed interpretation of VSOE and failing to establish that the prices it charged customers matched the prices set by the company’s management.

“JDA Software is relieved to put this matter behind it and to get back to continuing to be a leading provider of business software solutions,” said the company’s attorney, Luis Mejia of Perkins Coie LLP

In August 2012, JDA restated its financial results for 2008, 2009, 2010, and the first three quarters of 2011. The restatement covered the company’s revenue and earnings for all the periods.