For most software companies, “auditor” is a bad word. It tends to conjure up feelings of stress, anxiety, and helplessness. However, no matter how you feel about them, auditors play an important role in the financial process. Essentially, they are responsible for checking the accounting books of the company and providing some level of assurance to investors that management has been a diligent steward of their assets.
Auditors are skeptical by nature. It is a trait that makes them good at their job. Good auditors will take a “trust but verify” approach when it comes to reviewing the accounting books.
The accounting books for software companies tend to be fairly straightforward, so the audit is usually straightforward as well. There isn’t much inventory, fixed assets are limited to hardware, software, and furniture, and the main expense on the income statement is usually labor.
However, there is one area that can get complicated – Revenue Recognition. Worse yet, many companies make this process even more complicated by using QuickBooks as their accounting system.
QuickBooks is a wonderful bookkeeping system. However, it is not an accounting system, and that is what makes an audit complicated. Below are 3 complaints that auditors have regarding QuickBooks in regards to revenue recognition.
- VSOE calculations – As we have noted before, QuickBooks does not have the ability to perform VSOE revenue recognition calculations within the system. For companies that are running QuickBooks, these calculations are performed outside of the system, usually in a spreadsheet. Auditors do not like spreadsheets because they are not very secure, formula mistakes are easily hidden within cells, and they take a while to audit.
- Lack of Internal Controls – Another compliant from auditors regarding QuickBooks is that the system does not contain many internal controls, particularly around journal entries. To ensure that journal entries are appropriate, auditors like to verify that a journal was booked by one person and posted by another. However, they cannot do this in QuickBooks. The lack of internal controls will frequently lead to an increase in the sample size for revenue recognition testing.
- Revenue booked as a single entry – QuickBooks is not very robust. It can only capture a single entry for revenue. This means that revenue for the different revenue streams (licensing, training, and post contract support) cannot be differentiated easily. Auditors find this extremely frustrating.
You might be tempted to say, “Who cares about the auditor and his complaints! QuickBooks works for us and we are happy!” But what if you could have a system that made the auditor’s life easier and made your own revenue recognition processes more efficient? Would you care then?
The system I am referring to is NetSuite. NetSuite comes equipped with some unique revenue recognition tools such as the ability to calculate VSOE calculations within the system and audit trails. In addition, it is able to separate revenue elements and recognize different revenue types according to their appropriate revenue schedule.
NetSuite will not only make the auditor’s life easier, it will also make yours better. For more information regarding how you can reduce your current problems with QuickBooks, please contact us.