Revenue Practices for Tech Firms in the Spotlight

By Aarthi Rayapura June 16, 2015

Prominent technology firms are in the news and not about a life-altering app launch or in-house perk elaborate enough to make a millennial smile.

Nope, as we alluded to earlier, it’s the federal attention given to their financial reporting practices, with revenue drawing the brightest spotlight, a practice quickly becoming the industry norm.

As reported in Fortune recently, the U.S. Securities and Exchange Commission (SEC) has been peppering a number of high-profile tech firms, most notably Twitter and Etsy, about their revenue accounting policies, backing up research showing more firms in the high-tech space can expect a similarly inquisitive governmental glare to prevent over-valued stocks and another dot com meltdown.

Facts and figures from sources including The Wall Street Journal, The New York Times and global law firm, Proskauer Rose LLP, referenced in the Fortune article demonstrate the steady increase in the SEC’s focus on revenue reporting for technology firms. The Proskauer Rose report published earlier this year noted the SEC questioned 88 percent of the technology, media and telecommunications companies that went public last year about how they record and report sales, up from 79 percent the prior year. The same report found 30 percent of the companies that went public last year acknowledged being in serious risk of incorrectly reporting financial information, a steep jump from 17 percent the year before.

Etsy, the online marketplace for craft goods, found itself among that demographic when the firm had to revise a graphic clarifying company revenue in 2013 as $125 million, not $695 billion, following questioning from the regulatory agency in advance of its IPO. Etsy shares have dropped nearly 50 percent from the closing bell after the first day of public trading earlier this year. Twitter also found itself in the SEC cross-hairs over its own revenue recognition policies prior to its public offering in 2013. Other well known tech firms falling into this category include extreme camera company, GoPro, and food delivery service, GrubHub.

An important nugget of information to note: Revenue accounting policies getting the federal once-over were related to very small portions of overall company revenue in the cases of Etsy and Twitter.

Concern over loose reporting of revenue, or potential revenue, by private technology hubs combined with their obscenely inflated valuations – $1 billion or higher in some cases –  has not surprisingly drawn this extra regulatory attention from the government, forcing firms to double and triple-check their revenue accounting figures.

A company only gets one shot at an IPO so might as well make it count.