Vendor finances confuse

Many software vendors need to improve their accounting procedures to reassure investors and give their businesses long-term stability, according to investment bank Credit Suisse First Boston (CSFB).

Experts advise IT managers to keep a close eye on the finances of software suppliers, because in some cases investor jitters are threatening vendors' development plans.

In a report on the European software sector, CSFB analysts said that of the 158 US-based firms that restated their earnings last year, 20 percent were software manufacturers. "We believe most of these restatements were caused by liberal revenue recognition policies," the report stated.

There were major differences between the quality of firms' accountancy standards, according to the report, which revealed some of the most serious bad practices. CFSB was alarmed by inconsistencies in the way revenue is calculated, because the precise practices are rarely revealed to investors in financial statements although the methodology affects earnings figures.

CFSB recommended that software vendors should disclose whether revenues are booked as sales to resellers or once end-customers actually buy the products, and whether the revenues are based on shipments or installations.

The bank also advised that vendors should supply additional information on whether they separate licences from services. It expressed misgivings about the practice of vendors giving customers funds to purchase their products with no reasonable hope of repayment, and about the use of barter deals. The report also raised the issue of pro forma adjustments, which it said can undermine investors' ability to understand the financial prospects of companies, and it raised questions about the use of stock options as employee incentives, which may dilute earnings per share.

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