In its decade-long life, the Sarbanes-Oxley Act has triggered many emotional arguments. One that continues to persist, even all these years later, is whether management testing can be done in-house or should be done solely by independent consultants. Like any logical argument in life, both sides to the equation have valid points, including the ones below:

The case for independent consultants

  • Consultants provide independence: This is an area companies quickly embrace whenever someone looks at their past in-house testing with skepticism. I saw it firsthand at an established retail giant, where the company’s SOX project manager took great pride in asserting, “In the last five years, we have had no significant deficiency.” The applause that followed matched the kind you hear after an Olympic Gold performance. But another fine day, that same declaration didn’t get the same reaction. This time, the PMO said it to the brand-new controller, a former Big 4 partner, who wasn’t pleased. “But that means you have not been independent enough in your evaluation,” the controller said. Ouch! Silence all around. It’s hard to debate one of the strongest arguments for taking testing to external consultants — independence.
  • They bring a wider perspective: Independent finance pros step out a lot more than entrenched employees. They see different companies, distinct SOX departments, and a variety of mindsets. All of this makes them a valuable resource for SOX best practices, not just for uncovering flaws but finding ways to improve processes and figuring out the balance between tight controls and overwrought ones. They know what works well in certain types of companies and what doesn’t. Plus, they can anticipate what the auditors will likely expect down the line and prepare the company for those expectations (life is much easier when you can be proactive with your external accounting firm rather than scrambling when the auditors find something amiss). Employees, as an intrinsic part of the organization, usually can’t bring such up-to-date and diverse experience to the table.
  • They can reduce costs: It’s generally more cost-effective to outsource SOX testing to highly skilled, knowledgeable professionals, on a project basis, than taking on full-time employees. And these professionals may also help lower the total cost of SOX as external auditors will rely on the work of objective and competent third parties. The less time auditors spend scrutinizing what a company’s internal staff has done, the less the company has to pay in auditor hours.

The case for in-house testers

  • They may be able to extract more information from their colleagues. In-house testers, by working among their business and IT partners all year long, have the opportunity to build strong relationships and rapport over time. While such rapport can fuel the argument for independence, the fact is they could make more inroads in gathering information if their colleagues tend to be more helpful to those they already know and trust.
  • They know the business inside and out and have a vested interest in its future. Testers working from the inside can at times provide meaningful suggestions for process improvements — a strong and beneficial byproduct of the testing process. With a desire to keep their jobs and see their company thrive, they have a personal interest in uncovering inefficiencies. At other times, however, these in-house testers may hold back their ideas, not wanting to rock the boat with any of their fellow employees who may be affected by their suggestions.

What about a combo approach?
A trend, which appears to be gaining traction in Silicon Valley, is a mix-and-match approach, whereby the external consultants work in tandem with a select few from the in-house team. While it might appear that this is the “best of both worlds” scenario, it doesn’t play out that way in practice. The decision-making still tends to be made in-house, with all the pros and cons the in-house model entails.

The verdict: What makes sense for your company
Management needs and wants confidence in what the testers find and report to them (and so do investors and other stakeholders). The top executives put their name on the line to whatever is or isn’t uncovered during the testing process. Only you can decide, after weighing the pros and cons and the factors that go into the work involved, which method of SOX testing makes the most sense for your business and provides you with the right level of certainty.

Vivek Kumar is a member of the RoseRyan dream team. He has been working in SOX since the time it became law and from both sides, in-house and as an external consultant. When not doing SOX, Vivek keeps himself busy playing tennis and making feature films, the first of which hits theaters this summer.

We’ve been hearing about it for years. Finally, the result of the joint project between the FASB and the IASB to update and consolidate accounting standards for revenue recognition into one global standard is just about here. They’re expected to issue it by the end of this month.

This is when the fun begins. While there is time before companies have to issue financial statements under the new standard (which we’ll see in the first interim period of 2017 for public companies with fiscal years beginning after December 15, 2016), they will need to disclose the expected impact of the new standard right away. And they will need to be tracking transactions under the new principles beginning in 2015.

The biggest change is the shift from industry-specific guidance to the application of general principles across all industries. Companies will need to re-think how revenue will be recognized for their transactions, and in some cases they will be able to record revenue earlier than they do now. Here are my thoughts on what our clients should be considering in the months ahead.

If you work at a life sciences company
The revenue standard applies to all contracts with customers, including some collaboration arrangements for life sciences companies if they are in effect transactions with a customer. Collaborations might fall outside the scope of the new revenue guidance if the collaborator or partner is not in substance a customer, such as when a biotechnology company and pharmaceutical company have an agreement to share equally in the development of a specific drug candidate as well as the risk that comes with it.

Another change that will arise with the new standard is that variable consideration (such as milestone payments) may be included in the transaction price allocated to deliverables as long as the company has relevant experience with similar performance obligations and, based on that experience, they do not expect a significant reversal in future periods. Changes to these estimates will have to be allocated to performance obligations based on that initial allocation, unless a payment relates to a specific element and is consistent with the amount expected to be entitled for performance of that obligation.

When life sciences companies license their drugs to commercialization partners, they can estimate and recognize sales-based royalties when the partners’ subsequent sales occur and will not have to wait, as they do now, until each partner has reported such sales. These estimates can include only the amount that has a low probable risk of significant reversal.

Another change that will result in earlier recognition of revenue for life sciences companies is the recording of sales of new products when they ship, minus the estimates for returns. Currently, companies have to delay recognition on a sell-through basis if a pattern of return has not been established.

If you enter into license agreements
The new standard’s emphasis on when control transfers to the customer may change the timing of revenue recognition on licenses. A license is the right to use an entity’s intellectual property, such as software and technology, patents, trademarks, copyrights, music and movie rights and franchises. In some cases, a license is a promise to provide a right, which transfers at a point in time. In other cases, it is a promise to provide access to a right that transfers to the customer over time, such as if a licensor has continuing obligations under the arrangement that do not otherwise qualify as separate performance obligations, or if the licensor must actively make the IP available on a continuous basis during the license period, or if the licensee benefits from changes over time.

If you have software arrangements
For software arrangements, VSOE (vendor-specific objective evidence) guidance is no longer required, resulting in earlier recognition of revenue for licenses that lacked it for undelivered elements, including future upgrades, additional product rights or other vendor obligations. Companies still need to allocate revenue to each of the deliverables in the arrangement based upon best estimated selling prices (BESP). It simply allows for alternate methods of determining BESP beyond VSOE.

If you sell software as a service
You will need to assess software license and hosting services to determine if they represent distinct performance obligations. It is unclear what criteria will apply to determine whether a typical SaaS arrangement will qualify for service accounting treatment (over time) or if the software element should be recognized separately (at a point in time).

In addition, provisions entitling the customer to a refund if undelivered elements are not successfully provided — an issue that currently delays recognition — will be a part of the estimate of variable consideration, resulting in earlier revenue recognition in some arrangements.

If you’re a contract manufacturer
In contract manufacturing situations, the timing of revenue recognition will no longer revolve around when units are delivered but instead when a service is performed and when the control of goods are transferred to the customer over time. This change may require contract manufacturers to modify their systems and processes to recognize revenue in the new way.

If you work in the technology sector
Distributors and resellers tend to require price protection or right of return from manufacturers of technology products to protect themselves from obsolescence and price reductions. Manufacturers currently delay recognition of revenue from these transactions because of the possibility they’d have to give money back or accept product returns. Under the new standards, fees that are currently not considered fixed and determinable can be recognized to the extent the company can estimate the amount that has a low probable risk of significant reversal. This will result in earlier recognition of revenue for manufacturers.

When companies license their technology for use in tangible goods or services, they can recognize the royalties when sales or usage occurs to the extent they can estimate the amount that won’t reverse (subject to the constraint on variable consideration). Today, recognition is typically delayed until such sales are reported by the licensee.

What everyone should do in the meantime
These are just a few examples of impacts in certain industries. When the new standard is released, we encourage you to evaluate its impact on your company and business model. Don’t underestimate the subtleties the new principles guidance will change in revenue recognition. Without bright-line rules, there will be room for judgment but also room for differences in interpretation and implementation, particularly between you and your auditor. Let the fun begin!

Diana Gilbert has been a member of the RoseRyan dream team since 2008 with almost 30 years of professional experience. She excels at technical accounting, revenue recognition, SOX/internal controls, business systems and process improvements.

CFOs at high-growth companies are in a whirlwind. Everything around them is moving fast and the pressure is on to keep the positive figures moving upward and get a hold of the huge amounts of data the company is taking in every day. Unlike the CFOs of yesteryear, they’re not just stewards of their company’s finances but strategic players who have a direct say on how the company will move forward.

The smart ones, the ones who will be successful, will take a moment amid the crazy times to take a breath and figure out how can they live up to the expectations and responsibilities they have taken on. And here’s what they’ll remember: the key to their success are the people behind them. It’s easy to overlook this point when the company is barreling forward with new hires, shifts in strategies and expanding complexities. With a strong finance team that’s empowered by the trust of their superior, the CFO and the company as a whole are poised to make quick decisions that can ensure they stay on the high-growth track.

In a new intelligence report, A guide for high-growth CFOs, RoseRyan hits upon this challenge head-on with an emphasis on developing a hyper-efficient finance team. This involves shaking off silos and encouraging openness and collaboration between finance employees and the rest of the company. The CFO is in a position to cross any divide and push for any changes in technologies or processes to both empower the finance crew and give them access to real-time data to make real-time decisions.

The concept of entrusting employees of various levels in a mid-sized or large organization to make decisions based on their assessments of real-time data is relatively new. In this report, RoseRyan dream team member Jason Barker explains why it’s now possible and crucial for any company that wants to maintain its high-growth status. Download A guide for high growth CFOs to learn more.