Background of SuccessFactors
1. Success Factors, a U.S. Multinational company was not capable of earning enough profit. It went on incurring losses, since it got incepted in 2001, in almost every fiscal year (Bersin 2018). The estimated amount of loss being near about $12.5 million in 2010. Success Factors also has an amount of $231.3 million.as accumulated deficit (Bersin 2018).
However, $3.4 billion amount was paid by SAP which is nearly more than 10 times, of the revenue that Success Factors generated in 2011, that is estimated to be $327 million (Mckenna 2018). This amount was paid by SAP to purchase Success Factors in the earlier part of the year 2012 (Bersin 2018). SAP at that time had an intention of gaining a good market share along with proficiency in human resources software in the form of a service arena, as this field war rapidly growing. During that time, Success Factors already possessed a rich customer base which included subscriptions of 15 million seat licenses that were widely spread 3,500 customers.
Like other companies, Success Factors also amplified the financial results of the company which is in accordance with the generally accepted accounting principles known as GAAP, the base for preparing financial report, along with certain financial measures that are non-GAAP (Brown, Cohen and Huffman 2018). Obviously, the calculations of such non- GAAP financial measures are different in every company. Such a non-GAAP financial measure was known as backlog which were generally reported (Black et al. 2018). Service firms based on cloud computing, like Success Factors, always sent invoice to the subscribers on yearly basis, even if the subscription duration is of more than one year time span. Recording of the subscription amount that was invoiced to the subscribers, but not yet realized in the form of revenue, as deferred revenue was done. Success Factors however reported the amount of the total value of the contract that is not invoiced yet in the form of backlog. It had a backlog of $90 million in 2007 which rose to $43 million by the 2006 end, which portrayed an increase in newer contracts and subscribers of the company (Mckenna 2018).
Suddenly in 2009, the company wilfully stopped reporting the total backlog amount, which attracted the attention of the SEC which stands for Securities and Exchange Commission (Boyer, Lim and Lyons 2016). Naturally the SEC agency investigated the matter where they were told by Success Factors responded that according to the company investors, these backlog figures are not useful (Mckenna 2018).
However in 2011 Success Factors accepted that their accounting controls had material weakness and the internal control ineffectiveness over reports regarding financial matters. Even a Success Factor’s salesperson, who became a whistle-blower stated that the control over accounting matters eventually were so weak that many salesperson even swindled by rewriting existing contract as new contracts for earning more commissions (Khalil, Nawawi and Dato 2014).
As a matter of fact, no one was hurt with the case of improper accounting by Success Factors and the investors had the wheel of fortune. When Success Factors was taken over by SAP, SAP conducted an internal investigation of this accounting weakness on their own for a transparent understanding of in what way the backlog numbers got missed. The claim of the whistle-blower salesman however as per SAP, it conducted an investigation with the help of an outside law body and found no relevancy (Andon et al. 2018).
Reporting of Non-GAAP Financial Measures and Backlog
The investors indeed received a good lesson of being alert if any fraudulence was done by the salesman by rewriting the existing contract in the form of a new one.
2. The company management uses the non-GAAP financial measures in accounting for having a deep understanding and comparing effectively the different operating results, to perform calculation of the bonuses that are to be paid to the employees bonus, do evaluation of the financial performance and lots of activities are there. These non-GAAP financial measures are provided to the customers as an add-on to the results that are reported. These non-GAAP financial measures holds a well-defined meaning to the investors, because of the fact that the cash flows which gets generated as a result of the operations is of utmost important component of the operation that is ongoing.
The usage of non-GAAP financial measures do have certain limitations like it does not clearly portray proper cash position of the company, for example there is no proper reflection of income and expense items of the company. This is the reason that companies have formulated non-GAAP financial measures which are in line with the GAAP or Generally Accepted Accounting Principles. Thus management must encourage the non-GAAP financial measures not only as a substitute or in an isolated form but bind non-GAAP financial measures in accordance with the GAAP.
3. Measures that can also be adapted by the management to prevent improper accounting are as follows:
1. It is always important for every company managements to take preventive measures in order to prevent improper accounting or any weakness in their financial matters. Such a preventive measure can be establishment of internal controlling system for the purpose of assessing the risk factors that are probably connected to the accounting department. These internal controlling system must be tested for verification regularly to check whether it is functioning properly or is deviating from the expected standard.
2. Even an employer may be employed who will be responsible for performing a periodic checkup of the relevance of all those contracts that are new or existing, the number of customer, revenues that are getting generated from the operations and similar other factors of importance on a regular basis. This may help the company in dealing with any kind of fraudulence, rewriting of existing contracts as new contracts or even miswriting.
3. Technique of random sampling may also be adapted.
4. Company must have a proper checking system of the employee’s adherence to the rules and regulations.
5. Prompt punishment for the employees must be in place on deviation of those rules and regulations.
6. Training of the employees for a certain period and similar other measures should be framed to build up a stronger sense of ethics within the employees (Svensson 2015).
7. Job rotation of the employees will build confidence, but will also make the employees, properly behaved pool of human resources (Mossa et al. 2016).
References:
Andon, P., Free, C., Jidin, R., Monroe, G.S. and Turner, M.J., 2018. The impact of financial incentives and perceptions of seriousness on whistleblowing intention. Journal of Business Ethics, 151(1), pp.165-178.
Bersin, J. 2018. [online] Forbes.com. Available at: https://www.forbes.com/sites/joshbersin/2017/05/15/successfactors-by-sap-growth-and-innovation-continues/#2dc1df0f1033 [Accessed 22 Sep. 2018].
Black, D.E., Christensen, T.E., Ciesielski, J.T. and Whipple, B.C., 2018. Non?GAAP reporting: Evidence from academia and current practice. Journal of Business Finance & Accounting, 45(3-4), pp.259-294.
Boyer, B., Lim, R. and Lyons, B.M., 2016. A Case Study in the Use and Potential Misuse of Non-GAAP Financial Measures.
Brown, N.C., Cohen, S. and Huffman, A.A., 2018. Accounting Reporting Complexity and Non-GAAP Earnings Disclosure.
Khalil, M.A.K.B.M., Nawawi, A.B. and Dato’Mahzan, N., 2014. The intervening effects of whistleblowing in reducing the risk of asset misappropriation. Journalof BusinessandEconomics, p.1929.
Mckenna, F. 2018. online Forbes.com. Available at: https://www.forbes.com/sites/francinemckenna/2012/11/29/the-sec-and-accounting-fraud-enforcement-no-there-there/#575649f83490 [Accessed 22 Sep. 2018].
Mossa, G., Boenzi, F., Digiesi, S., Mummolo, G. and Romano, V.A., 2016. Productivity and ergonomic risk in human based production systems: A job-rotation scheduling model. International Journal of Production Economics, 171, pp.471-477.
Svensson, G., Wood, G., Singh, J. and Callaghan, M., 2015. Codes of Ethics Artefacts in Australia, Canada and Sweden: A Longitudinal Study. In Proceedings of the 2008 Academy of Marketing Science (AMS) Annual Conference (pp. 262-266). Springer, Cham.
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