I’ve heard some describe the Sarbanes-Oxley Act as the accountant’s version of the full employment act. If that’s true, what does it say about the current state of revenue recognition guidance the in U.S.? Recognition of revenue was once a simple concept - did you ship product or provide a service? If so, you likely recorded revenue in connection with such a transaction. Over the decades, however, business has become complex (or did we complicate it for ourselves?), and the complexity of revenue recognition has evolved as well.

We have seen the SEC, FASB, AICPA and other standard setting bodies develop reams of pronouncements and discussion on the subject of revenue recognition. Recognition of revenue has become so complex that it is among the top five reasons SEC registrants file restatements of previously reported financial results.

The topic of revenue recognition is also among the most concerning of issues that auditors contend with when planning and performing an audit. The rules can vary markedly depending on whether you’re a manufacturer, distributor, contractor, software vendor, service provider, financial institution, airline, broker-dealer, etc., etc., and can vary further if you have contracts with multiple elements, return or refund privileges, stipulated shipping terms, etc. For instance, there are currently at least 25 different industry-specific revenue recognition rules contained within U.S. accounting literature, including separate guidance for airlines, casinos, the film business, mortgage banks, hospitals, and software companies. Needless to say, we accountants have our hands full when it comes to this subject.

Given all this, it was intriguing to me when I heard that the Financial Accounting Standards Board (”FASB”) has agreed to issue a discussion paper [PDF] later this year with an eye toward boiling down the myriad industry-specific rules into a single general standard. This would mean that the airline industry would recognize revenue in a manner similar to the software industry.

Does such a conceptual framework make sense? Perhaps it can, but I will be watching closely for the FASB’s discussion paper this October/November. Despite the volume of existing revenue recognition literature and despite it’s occasional imperfections, it is a body of knowledge that has carried the U.S. far. As my dad used to say, “don’t fix it if it ain’t broke”. Let’s make sure we’re focused on the necessary fixes and not implementing change for the sake of change.

New guidelines on fraud prevention tactics were issued this summer in a joint effort by the Association of Certified Fraud Examiners, the AICPA, and the Institute of Internal Auditors. You can check out a summary press release here; the general theme they convey is that companies need to do more to prevent fraud along a number of fronts:

Five key principles within the guidance address governance, risk assessment, fraud prevention and detection, investigation, and corrective action. Following the guidance will help ensure that there is suitable oversight of fraud risk management, that fraud exposures are identified and evaluated, that appropriate processes and procedures are in place to manage those exposures, and that fraud allegations are addressed in a timely manner.

The risk of fraud is substantial and the median loss amounts have been increasing steadily over the years. For that reason I certainly share the desire to alert company leaders to the risk, especially in the current economic climate. The pressures of fraud are increasing on individuals as consumerism meets a downturning economic environment. The credit crunch, falling housing prices and the pressures of a consumption lifestyle will turn the unlikeliest individuals to acts of misappropriation (more on that in this MFA audiocast).

Though trust and delegation of authority are integral parts of enabling an organization’s members to achieve truly remarkable levels of performance, the lack of oversight can also open up gaps that enable fraud. They can be closed, however, through sound management principles that create oversight mechanisms that will monitor activity, promote transparency, and ensure that the collective assets of the organization are protected from malfeasance.

Despite suffering loss, organizations still have the onus of proving it and recovering lost property, often without the active involvement of law enforcement. Public agencies have limited resources and are often diverted by other causes — and no preventive regulations will ever match the safeguards provided by sound management and a well laid out process.

Local PD’s don’t have the resources to conduct forensic audits, and state and federal agencies only commit to glamour cases. These glamour cases are often restricted to publicly traded companies, identity theft, defrauding investors and other public related matters…there are many gems in this area, but a regional standout was the TJX case that surfaced last year. Internal breaches of fiduciary responsibility, especially when they involve businesses, are often low on the law enforcement totem pole.

The most important starting point in fraud prevention is realizing that the responsibility rests squarely on management’s shoulders to minimize opportunities for a potential fraudster. These newly issued guidelines cite practical approaches to prompt responsible managers to institute appropriate control mechanisms into their organizations. Applying such principles of effective oversight can promote efficiency, create transparency and effectively mitigate an organization’s risks of fraud.

This summer marked the passage of some noteworthy tax reform in Massachusetts that will be on our minds as year-end strategies start to take shape. Specifically, Governor Patrick signed an Act Relative to Tax Fairness and Business Competitiveness that his office says will close some corporate loopholes while reducing income tax obligations.

Key components of the Act include a combined reporting element that goes into effect next year and will have a significant impact on multi-state operations accustomed to filing separate returns; Massachusetts conformity with federal business entity classification; and reduction in overall corporate tax rates beginning in 2010.

While the tax reform generates additional income for the state — up to $482 million, according to the Massachusetts Business Roundtable — the changes create an interesting balancing act for companies. Depending on the extent of local operations, they may need to look at how much their in-state infrastructure will affect their tax payments.

We will take a more indepth look at the reforms for our annual tax seminar in the Fall, and in the meantime will continue to monitor major developments that take effect in 2009.