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Technology Stocks : IFMX - Investment Discussion -- Ignore unavailable to you. Want to Upgrade?

To: Lizzie Tudor who wrote (10155)	4/2/1998 3:52:00 PM
From: Robert Graham	Respond to of 14631

Yes, "creative" revenue recognition practices have become much more common over time and as you mentioned is becoming an "accepted" practice by the shareholder. Since the high-techs are in a competative industry, an industry not many shareholders actually understand, an industry that attracts the speculative element due to its many very high growth companies, an industry that both the speculator and investor alike expects a continuation of what has become a phenominal growth story, then I should not be surprised that the managers of this type of company has taken the lead in creative accounting practices. Some have said earlier on this thread that they look at revenue because it is more difficult to misrepresent. The thinking here is that due to accrual accounting techniques and some of the "leeway" that companies have with this approach to accounting in representing expenses, earnings may not be representative of the company's growth and may even provide a purposefully inaccurate statement of the profitability of the company. Even though I agree that the accrual accounting appproach does leave the door open to misuse, it is actually more dificult to willfully misrepresent earnings and their associates costs compared to the manipulation of revenue. When the accountant starts to "fudge" results on the books, it has its impact in multiple interrelated accounts. So it is more difficult to misrepresent entries within the bookkeeping system. Not only does the double entry system need to balance, but accounts have to compare well. A much easier approach is to misrepresent the revenue that enters the bookkeeping system before it gets translated into expenses and earnings along with their associated balance sheet type of entries. Manipulation through revenue is easier and leaves much less evidence behind in terms of book entries that do not compare well. For that matter, looking strictly at revenue, it is meaningless. It is important to understand the cost side of the picture in order to derive meaning behind revenue figures. As an outrageous example, I can pay people to purchase from my company by for instance giving the product away at a cost less than my cost. I would go out of business very quickly if I were to do this, but before I do, I would of booked some nice revenue figures. It is this elementary aspect of revenue that many seem to overlook, that there are costs associated with it. So ignoring costs as a solution to dealing with agressive if not creative (erroneous) accounting is no solution at all. Revenue can by easily manipulated be a company in how it is booked. There have been companies that held back the printng of invoices and even printed fake invoices to support their booked revenue figures. The printing of fake invoices is not that different from the practice of sending side letters with invoiced amounts that indicate the customer can return the shipment which they did not order in the first place for a full refund. I think this method to generating fake invoices is becoming more common. This is much easier to do than to create a set of interrelated book entries that look feasible. A much better alternative to uncovering what is "real" behind the book entries is to look at cash flow. The company you mentioned that books revenue when a customer satisfaction form is filled out is quite creative. Do they book the real revenue as "deferred", or is it completely off of the books? It is interesting to note that the company has essentially replaced the invoice with the customer satisfaciton survey in terms of what is used to generate bookable revenue. This piece of paper is much easier to manipulate than that of the invoice. I would believe in the efforts of the CEO toward servicing the customer if they were to have just made customer satisfaction an important part of their operative policy toward their customer. But when this is tied in with revenue recognition practices, I begin to suspect the intent of this policy. This is not a necissary practice in order to make customer satisfaction an important part of their relationship with the customer. Furthermore, if followed through in a straightforward manner, this approach can be harmful to the company's finances that shows up on the books. However, I never will believe a CEO will do something that is potentially harmful to the finances of the company, and I do not believe CEOs do anything on this level that is unnecissary. Perhaps I am the suspicous type, but I think there are other motivation that are not readily apparent for this very unusual method of revenue recognition. This practice may work for a high-growth company, but when there is a substantial revenue falloff encountered by the company, watch this practice change. Bob Graham