Beware: auditors increase focus on revenue recognition
The new revenue recognition standard promises to bring sweeping changes far beyond your organization's financial statements—to your business process and controls, agreements, and contractual provisions. Implementing the new standard effectively will require the active participation of employees from all the impacted areas, including accounting, legal, sales, and IT.
A recent Compliance Week webinar recommended building a core team responsible for creating a plan and process to identify and address issues. These obvious issues include customer contracts and information systems, compensation plans, bank covenants, debt agreements, leases, and taxes.
They also advise that this is a particularly good time to take a hard look at your internal controls over revenue recognition.
In September 2014, the PCAOB issued Staff Audit Practice Alert No. 12, Matters Related to Auditing Revenue in an Audit of Financial Statements, advising auditors that, "PCAOB Inspections staff continue to observe frequently significant audit deficiencies in which auditors did not perform sufficient auditing procedures with respect to revenue."
Auditor firms have responded by stepping up their audit procedures, demanding more compelling evidence that the controls over revenue recognition are well designed and operating at a level of precision sufficient to prevent and detect material misstatements. If you haven't already noticed, you should be prepared for your auditors to increase their focus on:
- Testing the recognition of revenue from contractual arrangements
- Evaluating the presentation of revenue—gross versus net revenue
- Testing whether revenue was recognized in the correct period
- Evaluating whether the financial statements include the required disclosures regarding revenue
The webinar provided excellent advice and strategies to respond to the pressures and risks resulting from these changes, especially the five key compliance risks for revenue recognition:
- Enforceable rights and obligations. Identify the contract with the customer.
- Obligation to transfer goods and services. Identify the separate performance obligations in the contract.
- Determining transaction price. Provide evidence of the transaction price.
- Allocate the transaction price. Show accurate allocation for multiple obligations.
- When to recognize revenue. The entity realizes revenue when it satisfies a performance obligation.
To continue exploring this topic, watch the full Compliance Week webinar. Together, they address both the direct and indirect implications of the new accounting standard.
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About the Author
Joseph Howell is Vice President, Strategic Initiatives at Workiva. Prior to cofounding Workiva, he served as Chief Financial Officer for a number of public and private companies. He also serves as the cofounder, organizer, and community moderator for the SEC Professionals Group.