& cplSiteName &

SEC Cracks Down on Book Cooking

Light Reading
News Analysis
Light Reading
11/22/2000
50%
50%

What do George W. Bush, Al Gore, and Lucent Technologies Inc. (NYSE: LU) all have in common? Fuzzy math.

Yesterday, Lucent reported a $125 million snafu in its revenue recognition for the last quarter, and it changed its guidance going forward as a result (see Lucent Shares Hammered by $125M Goof).

While Lucent isn’t giving any details regarding how this mistake came about, some experts think that it could have stemmed from Lucent’s practice of counting revenue before products had been shipped and installed in customer networks (see Lucent's Poor ATM Numbers Confirmed).

But a new standard accounting bulletin from the Securities and Exchange Commission, SAB 101, could put an end to some of this creative arithmetic. The new rules, which were adopted last year and will finally go into effect starting in 2001, will require that “revenue should not be recognized until it is realized or realizable and earned.”

What does this mean? In brief, the SEC says there must be persuasive evidence that a purchase agreement actually exists. Delivery must also have occurred, the seller’s price to the buyer must be fixed and determinable, and collectibility must be reasonably assured.

The way companies account for revenue has been an issue for networking equipment vendors for some time, say analysts.

“The big box business is lumpy by nature,” says Max Schuetz, optical networking analyst at Thomas Weisel Partners. “A company could ship a couple million-dollar boxes one quarter and then not ship any to that same customer the next quarter.”

This up-and-down purchasing cycle can be a nightmare for public equipment vendors. “Investors want smooth growth, so companies play with the numbers,” says Schuetz. “ If they are short one quarter they might borrow from the next quarter. But it gets dicey when they don’t have the advanced booking. That means the deficit builds until it blows up in their face. That is pretty much what happened to Lucent.”

Under the new guidelines companies could be more restricted in how they handle revenue. For example, the days of vendors shipping boxes without line cards and recognizing that as revenue on their quarterly statement could be over. Also, vendors won’t be allowed to recognize revenue on products that are still being tested by a customer.

“I think what the SEC was trying to do is just give some guidance on what is acceptable,” says Jim Kroeker, a fellow at the Financial Accounting Standards Board (FASB), a private organization for establishing standards of financial accounting and reporting, recognized by the SEC. “There hasn’t been a lot of formal written guidance for revenue recognition. This should help.” But analysts and industry experts caution that there may still be some wiggle room left in the rules. In fact, the new rules are open to interpretation.

“Someone might look at one piece of the rule and say that makes perfect sense, and another part might be a little less clear,” says Kroeker. “But it is up to the SEC to decide.”

One type of situation that might not be covered under the accounting bulletin has to do with vendor financing. There are still no clear boundaries regarding when revenue can be recognized from products that haven’t been completely paid for. This could be a problem as more vendors begin to offer vendor financing, especially if these vendors are backing unstable service providers that could default on their agreements.

“The problem is that even when carriers deploy a product or promise to deploy it, customers can still have it without paying for it,” says Schuetz. “There are still ways of getting around it.

“The most draconian approach would be to report revenue when you get cash payment from customers. That eliminates a lot of this debate. But if you did that, there would have to be a lot of re-education for investors. Telecom sales come in lumps, and that freaks out investors.”

For the most part, vendors seem to be taking the new rules in stride. During Nortel Networks Corp.’s Webcast yesterday, CFO Frank Dunn, responding to a question, told analysts that the company wasn’t worried about SAB 101.

“We reviewed the SEC proposal in detail in January,” said Dunn. “Going forward, this isn’t an issue; we’ve built it into our plans.”

Lucent said it would not comment directly but had this to say: “We are aware of the staff accounting bulletin and we’re currently evaluating the impact of it on our business,” said a spokesperson. “We will adopt the rules in 2001 as required by the SEC."

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

(0)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
Light Reading’s Upskill U is a FREE, interactive, online educational resource that delivers must-have education on themes that relate to the overall business transformation taking place in the communications industry.
NEXT COURSE
Friday, September 30, 1:00PM EDT
Gigabit & the Great Migration
Robert Howald, Vice President, Network Architecture, Comcast
UPCOMING COURSE SCHEDULE
Wednesday, October 5, 1:00PM EDT
Gigabit & Smart Cities
Joe Kochan, COO & Co-Founder, US Ignite
Friday, October 7, 1:00PM EDT
Gigabit & DOCSIS 3.1
Ty Pearman, Director, Access Architecture, Comcast
Wednesday, October 19, 1:00PM EDT
Securing a Virtual World
Rita Marty, Executive Director, Mobility and Cloud Security, Chief Security Office, AT&T
in association with:
From The Founder
Light Reading today starts a new voyage as part of a larger Enterprise.
Flash Poll
Live Streaming Video
Charting the CSP's Future
Six different communications service providers join to debate their visions of the future CSP, following a landmark presentation from AT&T on its massive virtualization efforts and a look back on where the telecom industry has been and where it's going from two industry veterans.
LRTV Interviews
CenturyLink: SDN/NFV Pose New Interconnection Possibilities

9|28|16   |   04:37   |   (0) comments


Network operators should develop new APIs and business processes for reselling virtual assets to each other, says CenturyLink's Bill Walker. That will enable them to build digital business portfolios that help them avoid becoming commodity transport providers.
LRTV Interviews
Level 3: Overcoming Terror of Being Supplier, Integrator & Developer

9|28|16   |     |   (0) comments


At Light Reading's NFV & Carrier SDN event in Denver, Travis Ewert of Level 3 Communications said there is terror in becoming supplier, integrator and developer, but it can be overcome and be cost effective.
LRTV Custom TV
Introducing IoT World News

9|27|16   |   01:43   |   (0) comments


Self-driving cars, medical sensors, smart cities... and refrigerators. In order to address the huge scope of IoT, KNect365 has created a unique online community that will help businesses to understand and monetize the opportunities that live within the IoT market. We look forward to welcoming you to IoT World News -- your gateway to a better connected future.
LRTV Interviews
AT&T: Re-usable Functions Next NFV Key

9|27|16   |   06:03   |   (0) comments


The next generation of NFV has to break functions down into re-usable software chunks, making everything much more cloud-like.
LRTV Interviews
Masergy on Security: Attackers Gaining Upper Hand

9|27|16   |   5:10   |   (2) comments


At Light Reading's NFV & Carrier SDN event in Denver, Ray Watson, vice president of Global Technology at Masergy, says that because of the growth in virtualization, the threat landscape is shifting in favor of the attackers. As a result, service providers need to think beyond just defending the perimeter and take a more holistic approach to security.
LRTV Interviews
Verizon Takes Next Step on Biz Virtualization Journey

9|26|16   |   4:38   |   (2) comments


At September's NFV & Carrier SDN event in Denver, Light Reading sat down with Victoria Lonker, director of Product and New Business Innovation at Verizon, to chat about where the carrier is with delivering virtualized services to business customers.
LRTV Interviews
Global Services: The $40B Face-Off

9|26|16   |   05:53   |   (1) comment


More service providers than ever before are battling it out to win a slice of what is now a $40 billion global communications services pie, explains Ovum Principal Analyst David Molony.
LRTV Documentaries
MEC Congress: The Key Takeaways

9|22|16   |   03:25   |   (3) comments


Three key takeaways from the Mobile Edge Computing (MEC) Congress in Munich, Germany.
Wagner’s Ring
Time to Shut Up About 'Dumb Pipes'

9|22|16   |     |   (12) comments


Service providers can't compete with OTT players. It just isn't in their DNA. Instead, service providers need to embrace what they're good at -- providing reliable, secure connectivity.
Wagner’s Ring
Keeping Your Tech Career Going After 50

9|21|16   |     |   (13) comments


How do you keep your career moving forward when you're past the half-century mark?
LRTV Interviews
Peering Into the Digital Future

9|20|16   |   04:25   |   (0) comments


Nick Thomas, practice leader of digital media at Ovum, talks about how digital transformation in the technology, media and telecom sectors will enable the development of a new range of applications and services for enterprises and consumers and how the upcoming Digital Futures event in London will examine ...
LRTV Custom TV
Napatech Tackles NFV's Major Challenge

9|7|16   |   08:42   |   (0) comments


One of the main challenges for network operators introducing NFV is to combine performance and flexibility in a cost-effective way, but there is a solution, explains Napatech's Dan Joe Barry.
Upcoming Live Events
November 3, 2016, The Montcalm Marble Arch, London
November 30, 2016, The Westin Times Square, New York City
December 1, 2016, The Westin Times Square, New York, NY
December 6-8, 2016, The Westin Excelsior, Rome
May 16-17, 2017, Austin Convention Center, Austin, TX
All Upcoming Live Events
Infographics
Hot Topics
Verizon CFO: Eat Our (Fixed) 5G Dust!
Dan Jones, Mobile Editor, 9/22/2016
WiCipedia: The Women Helping Women Edition
Eryn Leavens, Special Features & Copy Editor, 9/23/2016
Eurobites: Telefónica Taps Juniper for Network Security
Paul Rainford, Assistant Editor, Europe, 9/26/2016
Open Source Getting on My Nerves
Carol Wilson, Editor-at-large, 9/26/2016
Upskill U Kicks Off Gigabit Courses With Orange
Kelsey Kusterer Ziser, Editor, 9/26/2016
Like Us on Facebook
Twitter Feed
BETWEEN THE CEOs - Executive Interviews
Light Reading CEO Steve Saunders and UXP Systems CEO Gemini Waghmare discuss the strategic importance of digital identity for operators in the midst of transformation.
Join us for an in-depth interview between Steve Saunders of Light Reading and Alexis Black Bjorlin of Intel as they discuss the release of the company's Silicon Photonics platform, its performance, long-term prospects, customer expectations and much more.
Animals with Phones
There's Nothing Like Missing a Full Minute of Pokémon Go Click Here
Live Digital Audio

A vital part of increasing the number of women in comms is transforming the ways companies can support and empower women. While progressive company policies that support both men and women in achieving work-life balance are a step in the right direction, creating a company culture that supports those policies can at times be more challenging.

During this show, we'll talk to Lynn Comp, Senior Director of Industry and Sales Enabling (ISE) in the Network Platforms Group at Intel, about why those challenges exist and how companies can overcome them. She'll provide insight into how Intel has worked to create a culture that supports work-life balance, and provide steps and guidance for other companies wishing to do the same. We will also leave plenty of time to get your questions answered live on the air.