FloQast, a provider of close management software, is eyeing the problems with the new
“We just got done restating our revenue recognition within the last three weeks,” said FloQast CEO Mike Whitmire during a meeting last week at Accounting Today’s offices. “We got through our first audit as a company. It killed our revenue last year because we signed contracts and our contracts have two deliverables. We have an implementation fee and then a software fee. We’re not dealing with 50 deliverables on an order form. It’s pretty straightforward. The way our process works is we’ll sign a new customer and we’ll send them over to the setup team. The setup team works with them for one to two or three weeks, gets them set up, and then they’re off and running on the software. They’re supported by our account management team and then our support team as well. These are distinct teams that go behind this. But the revenue recognition [standard] says we need to recognize a setup fee over the course of the estimated contract life, which is pretty killer.”
The new rev rec standard, which takes effect for private companies at the end of the year, is proving to be difficult for many organizations. Public companies are already expected to be using it. To help companies adjust to the new standard, FloQast recently introduced revenue recognition software of its own (see
“For one, we have to try to estimate how long our average contract is, and we’ve only existed for three years as a revenue-generating business, so it’s kind of hard to tell at this point,” Whitmire explained.
FloQast decided to use five years, which seems to be the average time frame for a contract, although the number seemed almost arbitrary.
“I go back to this fundamental issue with recognizing services over that time frame because the matching principle of accounting says that revenue should match the expense associated with it and the expense associated with the setup fee that we’re recognizing over the whole term of the contract,” said Whitmire. “All that expense is recognized by our setup team when the setup is occurring so that should all be recognized as soon as they go live and they’re using it. The old rev rec standard had it right, in my opinion. I just have a kind of philosophical disagreement with the foundation of the guidance and that we’re violating the matching principle.”
He also believes the standard can have a distorting effect. “The other one that I don’t understand is that we’re estimating over five years,” said Whitmire. “Let’s say we sign a contract with a one-year customer, and they churn after the first year. Then what we have to do is we have to accelerate all the services revenue and book it in that one month, which gives you this false sense of revenue coming in a period. It’s actually a bad thing that occurred to the business. We lost a customer. However, the impact on the income statement is that you have more GAAP revenue than you would have expected. So that’s a little bit of a contrast there as well. The rev rec doesn’t necessarily line up with how the business is performing.”
The CEO of another software company, Tien Tzuo of Zuora, has also pointed to problems with the revenue recognition standard (see
Whitmire understands how the new ASC 606 standard for revenue recognition can help reduce fraud, however.
“I get where they’re coming from because there’s a lot of fraud around estimating setup fees and when work was completed,” said Whitmire. “That is easy to manipulate and make sure you can put revenue in the right place and hit earnings magically. So I understand the premise and what they're doing and why they’re trying to maybe avoid some of that estimation. But still it violates the very foundational accounting principles, which as a purist bothers me.”
Whitmire majored in accounting in college and then became an auditor at Ernst & Young for about four years before joining Cornerstone, a software company in Los Angeles. “I joined about a year before the IPO,” he said. “I was number five in the accounting department. I was there for three years. We blew up to a team of about 50 in that time and my job was to actually adopt the last revenue recognition change, EITF 08-1, which was really a huge project for me. It was maybe five months, and my work was totally dedicated to restating all this stuff. It was complicated and I could understand both what they’re going for and the rev periods as well. At Cornerstone I was there through this growth phase and that’s when I recognized how big of a pain the month-end close was for us from all different areas. That’s why I left Cornerstone and founded FloQast.”
Still, he believes the new revenue recognition standard could be a windfall for the accounting profession, perhaps the biggest since the passage of the Sarbanes-Oxley Act of 2002.
FloQast has been focusing on helping companies and their accountants deal with the challenges of the month-end close process and the new revenue recognition standard.
“I don’t know if it’s caught up to the senior accountant or the accounting manager level yet, but a lot of the work that’s coming about from these new guidance changes is more kind of staff level grunt work to really get it done and established upfront,” said Whitmire. “That’s where you have people who majored in accounting who are auditors right now because they want to get their CPA license. You have very few people who major in accounting and go directly into the private world that are qualified enough to be doing this stuff. I think for [ASC] 606 in particular, there’s a crunch right now and it’s going to get worse and worse because we have fewer people available.”
FloQast has been hiring CPAs for its staff, despite the talent shortage of qualified accountants who can deal with issues like revenue recognition.
“At FloQast we try to hire accountants for every group within our company,” said Whitmire. “We have 120 employees and about a quarter of them have a CPA license. That’s across every department: sales, marketing and even engineering. Two of the executives, myself and our co-founder, are both CPAs, but full disclosure, we’re inactive CPAs. But we have a hard time recruiting into that space because there just aren’t many accountants left. The way we get lucky is by pitching them on trying something new and getting out of doing the same old accounting stuff.”
To attract more CPAs, FloQast has been offering bigger referral bonuses. “We actually increased our referral bonus for CPAs internally,” said Whitmire. “If you bring a CPA to the company, that referral bonus is 2X the standard referral bonus. We’ve hired 30 CPAs at this point. Zero have quit, zero have been fired and zero have caused an HR issue. And they work so hard. They appreciate the environment we’ve created because they come from the tough world of audit where they work tons of hours. We’re not like that and we’re more lenient on dress code and work hours are more flexible, so they just love the environment we’ve created.”
