A recent job posting for an accountant at a software company stated “must be proficient in spreadsheet software.” The use of spreadsheet software such as Microsoft Excel or Google Doc Spreadsheet, has become a necessary component for accountants at software companies, but for all the wrong reasons. True, spreadsheet software provides tools for users to manipulate and present data in new and interesting ways. However, that is not currently how they are used.
An industry survey claimed that over 92% of software companies use spreadsheets to perform software license revenue recognition calculations. It can only be assumed that these spreadsheets are used to address a flaw with the ERP software. But at what cost?
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Most spreadsheets are clunky and can only be interpreted by the creator. In addition, they frequently contain errors, do not capture audit trails, and you can forget about version control. Besides these, there are three other key reasons that software companies should avoid the use of spreadsheets in their revenue recognition calculations:
1. Risk of Restatement
Software companies are using spreadsheet software to track vendor specific objective evidence (VSOE) calculations. These types of calculations require the tracking of the final sale price, the manipulation of these prices into a bell curve, and the application of the 80/15 rule.
On one or two items, these calculations are not difficult to perform. But, if a company offers a lot of products, these calculations can become large and difficult to manage. No wonder that over half of all revenue recognition restatements are attributable to some minor internal error.
2. Internal Controls
It is important that managers establish internal controls over their accounting processes. Controls help management and investor sleep at night. However, it is difficult to establish internal controls over spreadsheets. To establish an internal control environment, management would have to lock cells, develop some sort of track changes process, and make sure that only authorized users access the workbooks. Most managers that are tracking software license revenue recognition calculations in spreadsheets consider this idea too cumbersome.
3. Gaps in the ERP System
Software companies that use spreadsheets probably do so because their current ERP system does not provide them the right functionality to perform these calculations in the system. For example, QuickBooks does not have any built-in functionality to perform internal revenue recognition calculations. If software companies are running QuickBooks, then they are forced to advertise for accountants that are “proficient” in the use of spreadsheet software.
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Software companies that use spreadsheets for software license revenue recognition calculations are leaving themselves exposed to possible risks such as restatements and audits. However, there is an alternative.
NetSuite has the ability to automate the software license revenue recognition process. By automating the process, management is reducing the risk of restatement, ensuring the integrity of internal controls, and using all the functionality of their ERP. If you would like more information regarding how NetSuite could improve your revenue recognition processes, please contact us and we will answer your questions.
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