The Securities and Exchange Commission has sanctioned Scottsdale, Ariz.-based JDA Software Group Inc. for having inadequate internal controls, resulting in misstated revenues.
JDA agreed to settle the commission’s charges for a $750,000 penalty.
An SEC investigation found that the company failed to properly recognize and report revenue from certain license agreements it sold to customers, because its internal controls failed to consider information needed to determine a critical component of revenue recognition for software companies.
Companies must be able to demonstrate this component known as “vendor specific objective evidence of fair value” or VSOE when determining the fair value of certain services related to a software license agreement, and if they can’t, they can’t immediately recognize all of the revenue from that agreement.
The SEC found that JDA’s internal controls surrounding VSOE were inadequate in several ways, including:
- The company lacked adequate revenue recognition policies and procedures and failed to identify all service-related contracts needed for VSOE testing to determine the fair value of certain services.
- It did not have sufficient internal accounting controls to determine whether a software license agreement and related services contract were linked to each other.
As a result of these internal control failures, some of JDA’s financial statements for 2008, 2009, 2010, and 2011 were materially misstated. JDA restated those financial statements in August 2012, reporting that it had overstated its revenue for fiscal year 2010 by 4 percent and overstated EBITDA by approximately 18 percent. In connection with the restatement, JDA identified control deficiencies that constituted a previously undisclosed material weakness in its internal control over financial reporting related to revenue recognition.
