This paper entitled ‘Whistle-Blower Claims Accounting Shenanigans at SuccessFactors’ is a case study. This paper will try to show if anybody was hurt because of the alleged improper accounting. This paper will further try to show how the reporting of non-GAAP financial measures should be reported to the management as that would be useful to investors. This paper will also try to offer some recommendations and try to show the various measures that the management team can implement to ensure that there is no improper accounting of multilayer contracts.
SuccessFactors gives its subscribers software resources through the internet for a fee. SuccessFactors was doing improper accounting and a salesperson of the company who turned whistleblower, accused the company for misappropriating funds and for doing improper accounting (Abdelmaboud, Jawawi, Ghani, Elsafi and Kitchenham 2015). The salesperson also told the authorities that the employees at SuccessFactors were writing the contracts improperly in order to make it seem that the company was growing extremely fast. The investors were rewriting the existing contract thereby turning it to a new contract, even though the client was not a new customer. SuccessFactors was withholding the backlog figures. When the agency enquired as to why SuccessFactors was withholding the backlog figures, SuccessFactors told the agency that it felt that the investors did not consider the backlog figures useful. When SuccessFactors was bought by SAP, it took the help of a legal firm from outside to examine these claims and found no merit to these claims (Agrawal and Cooper 2015).
The investors of SuccessFactors remained unhurt by this improper accounting because SAP paid a lot of money to acquire the firm, which enables SAP to immediately start its business of cloud computing. The subscribers were hurt by this alleged misappropriation of funds and this improper accounting because SuccessFactors supplemented the monetary results with non-GAAP fiscal measures (Auradkar and D’souza 2015). Many cloud computing service organizations including SuccessFactors tends to invoice suppliers on a yearly basis even if the term of the subscription agreement is longer than a year. This is strictly unethical. The backlog of SuccessFactor was about dollar ninety million at the end of 2007 which was in sharp contrast to the backlog of dollar forty three million at the end of 2006. The company attributed this increase of backlog due to an increase in contracts and new customers (Black et al. 2018). In 2009, when SuccessFactor stopped reporting its backlog figure, the SEC noticed the omission. On being confronted, SuccessFactor said that it felt that investors did not consider this figure useful.
A salesperson at SuccessFactor who turned whistle-blower claimed that during the years between 2009 to 2011, accounting controls were so extremely weak at SuccessFactor that people in sales rewrote existing multilayer contracts as new contracts in order to earn some extra money, apart from their monthly wages and incentives. If the claims were found to be true, then it would increase the revenue of the company making the company look more financially sound than what it is at present (Black et al. 2017).
Generally Accepted Accounting Principles (GAAP) is the basis for financial reporting. Non-GAAP financial measures are central in terms of analysing the management activities. These reports are conducted at the time of earnings release and other communication forms for shedding light on the business, which covers the aspects beyond the financial statements. These reports are considered useful by many investors and analysts, who are of the opinion that GAAP do not usually help in preserving the company values. Non-GAAP financial measures eliminate the aspects, which are deemed to be transitory and uncontrollable by the management. As a matter of specification, non-GAAP financial measures consists of reports on audited financial statements including earnings before interest, taxes, depreciation and amortization (Boyer, Lim and Lyons 2016). The audits include the assistance of foreign experts, which enhances the customer base, increasing the sales revenue and the profit margin. Based on these aspects, it can be said that reporting of non-GAAP should be encouraged by the management.
Unlike other companies and organizations, SuccessFactors adopted non-GAAP financial measures. The manner of implementing such principles varies in its functions, which aggravates the complexities of the managers in terms of managing the accounting activities. Backlogs might be fruitful for the investors, however, it is a complex process, as it requires the maintenance of the subscribers on an annual basis. This maintenance strains the budget, requiring review of the budget. Invoiced amounts are considered as deferred revenue, which creates discrepancies within the financial parameter. These discrepancies alters the constructed budget, increasing the difficulties in terms of preparing the annual report. Based on these discrepancies, the management should not encourage the implementation of the non-GAAP principles (Chang, Walters and Wills 2016).
A striking example is $90 million backlog in 2007, which is more than $43 million backlog in 2006. Increase in the backlogs bestowed large number of customers on the company, SuccessFactors. Along with this, the company was enriched, as many new contracts increased the sales revenue and maximized the profit margin. Based on this upsurge, non-GAAP reporting can be encouraged.
2009 was the era when SuccessFactors stopped reporting the backlog figures to the higher authorities. During the inspection, SEC discovered the issue of non-reporting. Upon investigation, the personnel pointed that the figures were not useful for the investors. As per their claims, they complied with SEC rules and regulations. Their claims indicated limitations regarding contraction of the revenue through the multi-year contracts. In the annual reports of 2011, SuccessFactors confessed the material weakness in the internal control of financial reporting (Collier 2015). Consciousness towards the adoption of illegal ways makes it necessary for the management not to encourage reporting of non-GAAP principles. Capability towards developing comparative studies about financial reporting reflects the option of encouraging the reporting of non-GAAP principles. However, the managers need to monitor the reports for averting the errors.
As per the arguments of a salesperson turned whistle blower, from 2009 to 2011, SuccessFactor experienced negative outcomes. This negativity aggravated the complexities of the salespersons in terms of rewriting the existing multiyear contracts. The aim was to earn additional commissions. Delving deep into the statement of the whistle blower, strategic approach possesses flexibility in yielding high revenues (Guillamon Saorin, Isidro and Marques 2017). This would enhance the financial flexibility of the company. One of the important points is that it would reduce the backlog numbers. This reduction contradicts the financial flexibility, which the company can achieve through establishing contacts with the prospective investors. The regulations imposed by SEC are not subjected to the audits. The non-GAAP financial measures helps in reducing the adverse effects of large, unusual and nonrecurring transactions. The calculations within these measures are subjective, which enhances the individual financial statements of the companies.
In certain adjustments, violation of the regulations is acceptable. This is in terms of the misleading prohibition. In the case, SuccessFactors claimed that they adhered to the SEC rules. Therefore, SEC is at no fault, due to the clarity within the rules and regulations related to the reporting of the financial statements. Income statement is crucial within the reports in terms of achieving financial flexibility. SuccessFactor cannot be placed in this category, as they stopped sending reports SEC regarding the financial condition (Messerli, Voccio and Hincher 2017).
Improper accounting creates discrepancies within the budgets, which aggravates the complexities in terms of preparing the annual reports. Failure in executing these tasks delays the financial reporting. Therefore, certain steps needs to be adopted by the management in terms of reducing improper accounting. Acquiring latest and modern software would prove beneficial in exercising internal control towards averting the potential accounting risks. For this, risk assessment template can be considered. Meetings, discussions and open forums would enhance the awareness of the managers regarding the mitigating the risk levels for the accounting activities. Strategic planning would be helpful in gaining an insight into the time frame, cost and the resources needed for acquiring the software.
The internal controls needs to be verified at regular intervals for assessing the proper functionality of the accounting activities. For this, taking the assistance of the experts is a wise step in terms of averting the risks of system failures and malfunctioning. Self-efforts in this direction would result in further delays regarding the preparation of the reports regarding the financial activities.
Training is important in terms of making the employees acquainted with the dynamic mechanisms of the reporting of the financial measures. Within the training, aspects, which need to be included are periodic checks for the contracts, contact details of the clients, revenues among others. The employees need to be instructed about maintaining consistency in the execution of these activities for averting fraudulent services. In terms of data collection, the employees can be instructed to adopt random sampling for coping up with the time and financial constraints. Post training tests would enable the managers to assess the capability of the employees in terms of making practical application of the learnt skills. The performance of the employees in the post training tests holds prime importance for the managers in terms of making estimates regarding the progress with the reports.
Adherence to the rules and regulations helps in execution of the accounting activities in an efficient and effective manner. Incorporating Ethical Code of Conduct would be beneficial in mitigating the illegal approaches towards carrying out the accounting activities as well as reporting. This Ethical Code of Conduct would be effective in resolving the conflicts regarding the accounts. If the conflicts are uncontrollable, the statutory bodies can be referred for acquiring guidance and support. If these bodies conduct inspections frequently, the drawbacks in the accounting mechanisms would come to the forefront.
After indulging into a contract, its details can be registered and recorded. The clients can be handed over with a receipt, which possess the signed approval of the Foundation. These aspects reflects the reliability and validity of the investors towards the contracts. Prior to the initiation of the contracts, the Program Officer needs to be informed. His approval would indicate the role of the manager towards intimating the rules and regulations to the involved parties. After this, meetings can be conducted with the higher authorities in terms of setting the deadlines, within which reports need to be prepared about the accounting activities.
Extension of deadlines can be requested in case of the reporting of the financial measures. However, this can be allowed only if the reports are according to the GAAP principles. Upon receiving the request for extension, evaluation needs to be done for the reason of this request. If the request is valid and the cause is genuine, the companies get enough time for preparing the reports. However, if the request is invalid and reflects the company’s lackadaisical attitude, the statutory bodies possess the full right to decline the request for extension. This evaluation helps in detecting the false claims regarding complying with the standards and protocols.
Reporting of non-GAAP financial measures needs to be encouraged, as it would enhance the customer base for the companies. However, planning proves beneficial in terms of gaining prospective clients, who would support in enhancing the revenue and profit margin.
Annual renewals for the contracts would not alter the constructed budget. However, it would act as a revision for the terms and conditions of the contracts. These revisions would bestow new clients and clients upon the company. Market research in this case would be effective in terms of gaining an insight into the latest revisions in the accounting principles. Remaining updated regarding the rules and regulations would help in averting the chances of committing mistakes. For this, regular track needs to be kept on the websites regarding new updates. Negligence in this aspect would add vulnerability into the position of companies like SuccessFactor in terms of financial reporting.
References
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