Nightmare on Wall Street

By Aarthi Rayapura October 27, 2015

Stock shares take a nosedive.

The name Enron is being thrown around as a comparable narrative.

A special investigative panel is convened, and not for the purpose of deciding the holiday party theme.

If this were your company, you don’t need to peruse the cinematic offerings this Halloween season to scare up a fright. You’re living one.

Unfortunately for the folks in the financial offices of Valeant Pharmaceuticals International Inc., that’s exactly the scary situation being faced, as a plethora of news reports in recent days have made abundantly clear. It’s Halloween minus theĀ masks, costumes and candy corn.

Shares for the Canadian drugmaker tumbled 40 percent since a report surfaced last week alleging revenue recognition improprieties. The firm is standing by its financial reporting amid scandalous accusations of an invalid customer relationship for a subsidiary, leading to false revenue claims.

Executives at the heart of the company and the accusatory report traded barbs in the public eye this week as more details filtered out about the possible creation of ‘phantom accounts’ as part of an attempted fraud scheme to create invoices as a means of deceiving auditors and booking revenue.

Just the latest highly public reminder of the key significance placed upon proper revenue recognition – and the possible pitfalls when it goes sideways.

In a piece for the Wall Street Journal, Kyle Cheney, a partner with Deloitte & Touche LLP, said financial close technologies available today offer not only a platform to standardize the close process and improve data quality, but a true value in reporting capabilities.

“Developing and then getting approval for 10-K and 10-Q filings can be difficult when all you have to work with are emails and spreadsheets,” he said. “When these processes are automated and rationalized, the quality and the timeliness of reports and disclosures often improves, which may reduce regulatory risk.”

Need another reminder on the importance of having your ‘ducks in a row’ when it comes to revenue accounting?

The newly converged revenue recognition guidelines announced last year brought with it the attention of the Securities and Exchange Commission as the agency’s chair, Mary Jo White reported a 20 percent increase in enforcement action in this area in 2014, per a report in CFO.com. Other agency leaders have cited revenue as the ‘next frontier’ in enforcement efforts.

In an unfortunate – yet timely – example, the SEC is looking into IBM’s revenue recognition of certain transactions globally, CNBC reported this week. Shares of the tech titan’s stock dipped 3 percent on the news.

As Harvard Business School professor Robert Eccles, co-author of “The Values Reporting Revolution: Moving Beyond the Earnings Game,” has noted in various articles, transparency pays in company dealings. The marketplace, Eccles notes, will give higher value to firms which are upfront and forthcoming with investors and with analysts.

If only the good folks at Valeant had considered this earlier. Their Halloween might’ve been a little less scary.

Just another example illustrating the benefits of automating your revenue accounting.

In case you are not aware about the skeletons in your closet.