& 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
Educational Resources
sponsor supplied content
Educational Resources Archive
From The Founder
Cisco's Conrad Clemson, recently promoted to head up the company's Service Provider Apps & Platforms developments, talks to Light Reading's Founder and CEO Steve Saunders about how he's bringing cloud video, mobile and virtualization together to empower network operators.
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
Heavy Reading: The Webscale View

1|18|17   |     |   (0) comments


At Light Reading's 2020 Vision Executive Summit in Rome, Heavy Reading's former chief analyst Patrick Donegan shared insight from the recent webscale operators report, which featured research on how webscale operators view the market, the best webscale companies to ...
LRTV Custom TV
Cisco's Cloud Scale Networking: Automation, Virtualization & Simplification

1|18|17   |     |   (0) comments


Cisco's Sanjeev Mervana outlines the latest innovations in networking technology at CES 2017 in Las Vegas.
LRTV Custom TV
ADVA Talks Innovation & the Future of Networking

1|17|17   |     |   (0) comments


Ray Le Maistre and Christoph Glingener, CTO of ADVA Optical Networking, discuss the current state of the industry, cooperation and collaboration, open innovation and the future of networking.
LRTV Custom TV
Cisco's Infinite Video Platform

1|17|17   |     |   (0) comments


Cisco's Infinite Video Platform allows service providers to deliver broadcast-quality video over IP networks. Infinite video supports many devices, from 4K TVs to tablets to game consoles. Join Cisco's Rajeev Raman for a brief tour and live demo.
LRTV Interviews
Masergy: Ability to Adapt Key for NFV

1|16|17   |   6:40   |   (0) comments


Speaking at Light Reading's 2020 Vision in Rome, Masergy's VP, Global Technology, Ray Watson, said agility is key to providing the mix and match NFV-based services that are driving business for the managed service provider today.
LRTV Interviews
Equinix: The Data Explosion

1|13|17   |   4:16   |   (0) comments


At Light Reading's 2020 Vision in Rome, Eric Schwartz, president of EMEA, Equinix, talked about how Equinix is helping its customers manage the influx of data today, and how it's preparing for a future filled with millions of connected IoT devices.
LRTV Interviews
Heavy Reading: The Changing Data Center Landscape

1|12|17   |   6:05   |   (1) comment


At Light Reading's 2020 Vision event in Rome, Heavy Reading's Senior Analyst Roz Roseboro talks about how virtualization is impacting data center evolution and how that evolution is affecting the relationship between service providers, data center operators and public cloud providers.
LRTV Interviews
Boingo: Prepping for Millions of Devices

1|12|17   |   5:07   |   (1) comment


At Light Reading's 2020 Vision in Rome, Boingo's CTO Derek Peterson discusses how wireless operators will address the needs of low-bandwidth and high-bandwidth apps at the same time, the need for more MHz, the impact of IoT and more.
LRTV Interviews
Comcast Shows Off Gig Gateway at CES

1|11|17   |     |   (1) comment


With its largest presence at CES in years, Comcast took the wraps off its long-awaited gigabit gateway and a new platform for managing the home WiFi network. Light Reading Senior Editor Mari Silbey sat down with EVP Chris Satchell to discuss the latest Comcast advance, and met with VP of Product Strategy and Development Andrea Peiro to walk through a demo of the ...
LRTV Interviews
Colt: End-to-End Key for 2017

1|10|17   |   6:21   |   (0) comments


At Light Reading's 2020 Vision Executive Summit in Rome, Nico Fischbach of Colt said having a multi-carrier, end-to-end service proposition is going to be key for 2017 -- and SD-WAN is instrumental in making it happen.
From the Founder
Cisco's Clemson on Mobile Cloud Video

1|9|17   |     |   (1) comment


Cisco's Conrad Clemson, recently promoted to head up the company's Service Provider Apps & Platforms developments, talks to Light Reading's Founder and CEO Steve Saunders about how he's bringing cloud video, mobile and virtualization together to empower network operators. "If you think about where we're going… whether it's a mobile application, or a video ...
LRTV Custom TV
VMware Telco NFV Solutions – Preparing for 5G & IOT

1|9|17   |     |   (0) comments


Shekar Ayyar, EVP & Corporate Strategy/General Manager of Telco for VMware, discusses VMware's Telco NFV solutions role and foundation for the Imminent Arrival of 5G & IOT.
Upcoming Live Events
May 15-17, 2017, Austin Convention Center, Austin, TX
All Upcoming Live Events
Infographics
Hot Topics
A Women in Comms Glossary
Sarah Thomas, Director, Women in Comms, 1/18/2017
Ericsson: 5G Heralds 'New' New Economy
Mari Silbey, Senior Editor, Cable/Video, 1/12/2017
Next Plugfest Gets G.fast Closer to Market
Brian Santo, Senior editor, Test & Measurement / Components, Light Reading, 1/13/2017
TV's Paradox: No HDR Without 4K
Mari Silbey, Senior Editor, Cable/Video, 1/17/2017
Cable Has One Thing Verizon Needs
Mari Silbey, Senior Editor, Cable/Video, 1/17/2017
Like Us on Facebook
Twitter Feed
BETWEEN THE CEOs - Executive Interviews
Light Reading founder and CEO Steve Saunders chats with Sportlogiq CEO Craig Buntin about sports data analysis.
Eyal Waldman, CEO of Mellanox Technologies, speaks to Steve Saunders, CEO of Light Reading, for an exclusive interview about the 100 GB cable challenge, cybersecurity and much more.
Animals with Phones
Live Digital Audio

Playing it safe can only get you so far. Sometimes the biggest bets have the biggest payouts, and that is true in your career as well. For this radio show, Caroline Chan, general manager of the 5G Infrastructure Division of the Network Platform Group at Intel, will share her own personal story of how she successfully took big bets to build a successful career, as well as offer advice on how you can do the same. We’ll cover everything from how to overcome fear and manage risk, how to be prepared for where technology is going in the future and how to structure your career in a way to ensure you keep progressing. Chan, a seasoned telecom veteran and effective risk taker herself, will also leave plenty of time to answer all your questions live on the air.