Informix and Go Daddy Case Studies Take Away

Hello Aniket,

I read Informix crash and Go Daddy case studies. I can summarize here -

Informix overestimated their revenue without considering product license return from their distributors but Go Daddy was very conservative and they considered part of their revenue in respective accounting period but full expenses associated with it. This was my takeaway. Please correct and elaborate it (They are little bit complex.)

Both are opposite. Is there any standard GAAP to recognize the revenue when non refundable products/services are delivered with full revenue. Do we have to apply own favourable rule, depict the same in audit report and stay with it for longer term? 

How auditors catch them? Balance sheets and income statements are driven by millions of credit-debit transactions. 

Though it is small topic but I felt little complex as there is no specific right answer. Your responses will help us to think from auditors perspctive :)

Aniket :

Correct in your analysis Sampat.

You would see this often with some "new-age" companies that financial statements prepared using accounting conventions (GAAP) somehow is not able to holistically capture business realities. This is because accounting evolved from manufacturing and an assembly line format, and it's not always that we can port that world into this one. In level 1, you did a PVR problem, and we spoke of the relationship between COGS and Inventory - PVR is selling seats in a show, and somehow there's no good way of putting that up as inventory. Instead, we put up spare parts and unsold popcorn in Inventory.

Godaddy is an instance of this unadaptability. The business reality is one way and the accounting conventions treat it in a different way. And the big debate in the case of godaddy is revenue recognition. You can argue that Bob Parsons was right. But well, accounting standards don't change for one company. They are strict.

Informix is slightly different. This case represents the fungibility (leniancy) in the accounting profession when it comes to recognizing revenue in a different setting. The company recognized revenue when it should not have and paid the price. See, these cases are borderline unethical - the big principle which got violated here is the principle of conservatism. As for auditors, however right-intended they may be, there's always some fish that escape the net. And we don't hear of the many that auditors have indeed caught (though it remains internal). And that there is an information asymmetry here which makes it even harder for auditors to catch such cases.

And finally, no right answer. Correctamundo.