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Revenue Recognition

Additional Reading Material


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Copyright 2012 Deloitte Development LLC. All rights reserved.
Revenue Recognition: Computer Associates
Holding Quarter Open
Computer Associates
Designs, develops, markets, licenses, and supports software products
worldwide
SEC complaint alleged among other things:
CA Prematurely recognized over $3.3 billion in revenue from January
1998 through September 2000
o Involved at least 363 software contracts that the company or its
customers had yet to execute
Delayed the quarter closing and included revenue from subsequent
periods
o Known internally as 35-day months
Revenue was overstated by 25%, 53%, 46% and 22% for the 1st, 2nd,
3rd and 4th quarters of 2000, respectively

Copyright 2011 Deloitte Development LLC. All rights reserved. 3 Footer
Copyright 2012 Deloitte Development LLC. All rights reserved.
Revenue Recognition: Computer Associates
Holding Quarter Open
RESULTS
Agreed to a settlement of $225 million for restitution to shareholders
Corporate governance and financial accounting controls reform
Indictments
Sanjay Kumar former CEO and Chairman of the Board
Stephen Richards former Head of Worldwide Sales
Stephen Woghin former General Counsel
Pled guilty to securities fraud conspiracy and obstruction of
justice charges
SOURCES: SEC Litigation Release 18891 and U.S. Department of Justice Press Release, 9/22/2004
Copyright 2011 Deloitte Development LLC. All rights reserved. 4 Footer
Copyright 2012 Deloitte Development LLC. All rights reserved.
Revenue Recognition: Homestore.com, Inc.
Round-Trip Sales
SOURCE: http://www.sec.gov/news/press/2002-141.htm
Excerpt from the SEC Complaint:

Bogus Barter Transactions. Throughout 2000 and 2001, Homestore's sale of
online advertisements was one of its primary revenue sources. Homestore
engaged in a series of complex round-trip barter transactions to inflate revenues
and meet Wall Street estimates. The essence of these transactions was a
circular flow of money by which Homestore recognized its own cash as revenue.
Specifically, Homestore paid inflated sums to various vendors for services or
products; in turn, the vendors used these funds to buy advertising from two
media companies. The media companies then bought advertising from
Homestore either on their own behalf or as agents for other advertisers.
Homestore recorded the funds it received from the media companies as revenue
in its financial statements, in violation of applicable accounting principles.
Copyright 2011 Deloitte Development LLC. All rights reserved. 5 Footer
Copyright 2012 Deloitte Development LLC. All rights reserved.
Revenue Recognition: Homestore.com, Inc.
Round-Trip Sales
SOURCE: http://www.sec.gov/news/press/2002-141.htm
As a result of a significant revenue
shortfall in the first quarter of 2001,
the company devised a plan to use
a major media company as an
intermediary in some round-trip
transactions. The overall scheme
required Homestore to "refer"
vendors to the media company,
and the vendors to purchase
online advertisements from that
company. In return, the major
media company purchased
online advertising from
Homestore for which the media
company acted as a media buyer.

Copyright 2011 Deloitte Development LLC. All rights reserved. 6 Footer
Copyright 2012 Deloitte Development LLC. All rights reserved.
Revenue Recognition: Homestore.com, Inc.
Round-Trip Sales
SOURCE: http://www.sec.gov/news/press/2002-141.htm
Using this structure, Homestore paid a total of $49.8 million to various vendors
in the first two quarters of 2001. These vendors then paid $45.1 million to a
major media company to purchase online advertisements. Homestore, in
turn, recorded $36.7 million in revenue from the major media company's
related purchase of Homestore online advertisements. In short,
Homestore recycled its own money to generate revenues. Homestore used
this same general plan with another media company in the second and third
quarters of 2001 to fraudulently recognize an additional $9.7 million in
revenue.

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Copyright 2012 Deloitte Development LLC. All rights reserved.
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