A whistleblower lawsuit filed against
Oracle Corp (ORCL.N) over its
accounting practices underscores the pressures established computer companies
face to show that they are growing in the fast-moving business known as the
cloud.
The lawsuit, filed on Wednesday in
U.S. District Court in San Francisco by former Oracle senior finance manager
Svetlana Blackburn, also revives longstanding questions about proper accounting
when software and computer services are bought on a subscription basis rather
than as a single package, analysts said.
Those questions are becoming more
urgent as companies including Oracle, IBM (IBM.N), Microsoft (MSFT.O) and SAP (SAPG.DE) race to transform their
businesses for an era in which customers no longer own and operate their own
information technology systems and instead lease computing services and
software from cloud vendors using vast data centers.
Blackburn's lawsuit accuses Oracle
management of pushing her to "fit square data into round holes" to
make Oracle's cloud services' results look better. She alleges that her bosses
instructed her to add millions of dollars of accruals for expected business
"with no concrete or foreseeable billing to support the numbers."
"We are confident that all
our cloud accounting is proper and correct,” an Oracle spokeswoman said on
Thursday, adding that Blackburn worked at Oracle for less than a year and was
terminated for poor performance.
Blackburn does not use the word
“fraud” in her lawsuit, and analysts say outright fraud is unlikely.
Nevertheless, the situation poses
risks, said Pat Walravens, an analyst at JMP Securities, partly because
Oracle’s sales force has been offered big incentives to book cloud deals. An
Oracle spokeswoman did not immediately respond to a request for comment about
the incentives.
Oracle shares fell almost 4
percent the day after the lawsuit was made public.
Accounting for cloud software “can
get very complex and requires judgment calls and estimates which a third party
might disagree with upon further review,” Walravens added.
Because cloud software is growing
fast while traditional software sales slow, companies have an incentive to play
up their prowess in the cloud.
In quarterly reporting, many
companies have begun to break out some measure of cloud revenue, including
Oracle, SAP, Microsoft and Amazon.
Accountants and analysts say that
classifying software sales as cloud or traditional remains something of an art.
“There’s some subjectivity in 'is
it cloud, is it traditional software?,” said Steve Biskie, an auditor and
co-founder of compliance consultancy High Water Advisors.
Like others, he said the most
nebulous part of cloud accounting concerns situations where the customer buys a
product that can be used partly in the cloud, and partly on its own hardware.
U.S accounting rules state that in
cases when use is mixed, companies should allocate the revenue between
traditional, or licensed software; and cloud, or hosted software.
“Determining the fair value of the
software license and hosting service may require the use of estimates,” the
rules say. “Management should consider all relevant information, such as
information from the negotiation process with the vendor, in estimating the
fair value of the license.”
There lies the gray area, says
Enterprise Strategy Group analyst Dan Conde, and the point on which the Oracle
lawsuit might hinge.
“They can’t tell how much I use my
own hardware,” he said. “Am I a casual user, or writing a lot on a computer? It
then requires some guesswork there.”
Software accounting issues have
dogged companies for years, particularly subscription-software businesses.
Three years ago, the U.S. Securities and Exchange Commission investigated IBM
over how it reports its cloud-computing revenue, an investigation that ended in
2014 with no enforcement action.
Five years ago, Bernstein analyst
Mark Moerdler took cloud-software company Salesforce.com Inc (CRM.N) to task for financial practices
such as how it accounts for sales commissions.
An SEC inquiry over a similar
issue, which ultimately led to the company restating its 2002 and 2003 results,
contributed to a delay in Salesforce.com’s 2004 initial public offering.
In 2006, software maker Computer
Associates (CA.O) had to restate past financial
results after an internal audit found issues concerning stock options and how
the company booked some subscription revenue.
Its former chief executive, Sanjay
Kumar, pleaded guilty to securities fraud in 2006 and was sentenced to 12 years
in jail.
(Reporting by Sarah McBride; Editing by
Jonathan Weber and Bill Rigby)
No comments:
Post a Comment