Federal securities regulators, concerned with the growing number of companies inappropriately managing earnings by artificially boosting revenue, issued guidance on revenue recognition last week.
The Securities and Exchange Commission (SEC) released a staff accounting bulletin (SAB) that discloses how companies should manage revenue recognition practices. The SAB also points out basic criteria that companies must adhere to before they can record revenue.
According to the SEC, one common earnings management tool, reporting revenue before a sales transaction has occurred, can cause improper revenue recognition and may cause "spectacular, high-profile financial reporting problems."
SEC Chairman, Arthur Levitt, promised more than a year ago that he would ensure that the agency would communicate more information on revenue recognition. He has spoken out about companies who "cook the books" to meet Wall Street expectations.