Guidance Issued on Revenue Recognition

By Anthony J. Mancuso, CPA

The AICPA recently released Audit Issues in Revenue Recognition, a publication "designed to help auditors and preparers of financial statements better appreciate the importance of accurate revenue recognition."

The AICPA issued the publication in response to an October 1998 letter from Securities and Exchange Commission Chief Accountant Lynn Turner on auditing and financial reporting concerns. The letter cited issues to which the SEC believes auditors of public companies should give greater consideration, and it recommended potential topics for AICPA Audit Risk Alerts.

The AICPA publication addresses the responsibilities of all members of the financial community to report accurate revenue; patterns that may signal improper revenue recognition; and suggested procedures for auditors. It focuses on revenue recognition for sales of goods and services by for-profit enterprises in the ordinary course of business, but does not address revenue recognition for governmental and not-for-profit entities.

Over the past few years, revenue recognition has posed risks to auditors. Last year, several high-profile incidents of companies reporting inaccurate revenues (e.g., Cendant and Sunbeam, among others) attracted media attention and impacted investor confidence in these companies. In response, and reflecting an emphasis by SEC Chair Arthur Levitt to address the financial community's growing use of what he terms "earnings management," the SEC has taken a more vocal position on related issues. The SEC applauded the AICPA's efforts.

"[The AICPA's] timely and high-quality guidance on revenue recognition is an important step in our continuing efforts to make sure the public interest is being served through appropriate reporting," Turner said.

The SEC plans to release a Staff Accounting Bulletin on revenue recognition that will be available on its website, www.sec.gov. *