Oracle Whistleblower Suit Raises Questions Over Cloud Accounting (nbcnews.com) 63
Svetlana Blackburn, a former senior finance manager for Oracle claims that the company has fired her for not "inflating" revenues in its cloud services division. She alleges that her bosses had instructed her to add "millions of dollars of accruals" for expected business "with no concrete or foreseeable billing to support the numbers." Oracle eventually inflated the numbers without her assistance, anyway, she adds. From NBC News report: The lawsuit, filed on Wednesday in U.S. District Court in San Francisco by former Oracle senior finance manager Svetlana Blackburn, also revives longstanding questions about proper accounting when software and computer services are bought on a subscription basis rather than as a single package, analysts said. Those questions are becoming more urgent as companies including Oracle, IBM, Microsoft and SAP race to transform their businesses for an era in which customers no longer own and operate their own information technology systems and instead lease computing services and software from cloud vendors using vast data centers.A spokesperson for Oracle says that Blackburn's claims are wrong, adding, "We are confident that all our cloud accounting is proper and correct."
Translation (Score:5, Insightful)
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Cheating by reporting too much earning has its own punishments: First, you get taxed for fake profits. Then, these profits doesn't come at all.
Re:Translation (Score:5, Insightful)
Then your stock price skyrockets due to the inflated profits.
Then you sell your stock when it peaks, take a golden parachute and watch the company crash and burn while sipping mojitas on the Bahamas.
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And then you run for Senate.
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how naive (Score:1)
An accountant's perspective (Score:5, Insightful)
"We are confident that all our cloud accounting is proper and correct." == "We are confident we paid off the right politicians to get nothing beyond a slap on the wrist for our doctored books."
I'm a certified accountant (among other things). What it probably really means is that the rules are sufficiently poorly defined that Oracle figures they have enough weasel room to claim what they are doing is permissible. And they may be correct in that assertion. It also probably means that what they are doing won't result in any issue worse than a fine and probably will have minimal impact on their stock price or bottom line long term. I don't have any idea if Oracle is doing something illegal here or not but I'm not surprised they would make a statement like that. Could result in some fines after years of litigation but probably won't amount to anything material for them even if it should.
One of the problems (especially with intangible goods) is consistently determining when to book the goods as a sale. This often isn't as straightforward as you might think and there are often several potential acceptable answers. The important thing is that A) what method they are using is understood and made clear and B) that they follow it consistently. For example my company books a sale when we receive a purchase order from a customer. A cloud software company might choose to book the sale based on expected retention rates and then adjust the numbers later for bad debts based on actual cash received. There are accounting guidelines for what is generally considered acceptable and what isn't through the FASB [wikipedia.org], the IRS and some other government agencies like the SEC. Obviously making up sales out of whole cloth is clearly illegal but if there is anything backing up the numbers at all then it can get a lot fuzzier real fast.
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Considering more and more companies are using non-GAAP accounting measures [marketwatch.com] to deceive investors, it appears they've already determined what method to use while not making it clear what they're doing.
GAAP, IFRS and made up BS (Score:4, Interesting)
Considering more and more companies are using non-GAAP accounting measures [marketwatch.com] to deceive investors, it appears they've already determined what method to use while not making it clear what they're doing.
Well if you are a global company you aren't using GAAP outside the US anyway. You probably are using IFRS [wikipedia.org]. If you are an investor seeing words like Pro-Forma you should . Pro-Forma is roughly translated from latin as "Fairy Tale" or "Bullshit we made up".
That being said, any accountant worth their per-diem can use GAAP accounting that is perfectly legal and still obfuscate what is really going on. Plenty of companies do it. Go pull the financial records of any large bank and if you claim you can make sense of them you are either in line for a Nobel prize or a liar and I'm going to lean towards the later. I'm a certified accountant and I can't make heads or tails of them.
Accounting rules are craazzyy (Score:3)
Accounting rules are crazy. Whenever I have something explained to me by an accounting, I'm often baffled at how it works.
The most recent example was a customer who sold prepaid punch cards to their members for an activity. The member bought a punch card for $100, good for 10 activities which normally would have sold for $12.
Strangely (to me anyway), even though the organization got all $100 at once from their member when a card was bought, they only accrued income when a punch was used.
My customer didn't
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I think Microsoft similarly did something to make Windows license fees *look* more like subscription. Instead of realizing the purchase price up front, they count 25% up front, then 25% a year later, and again and again.
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It's called unearned income
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The fuck it is.
It's called accruals (as opposed to cash) accounting.
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Actually it makes perfect sense from their standpoint.
They sold $120 of their services for $100.
But if they only charge it per punch, they can carry all remaining punches as liabilities offsetting the net gain of the $100 until they are realized. This gives net loss which helps which reducing taxes, while actually increasing cashflow. If it never gets fully used its all profit for them as they already your money, but they get to keep these phantom liabilities forever.
This is my general understanding at leas
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It kind of makes sense to me: I am not an accountant but here goes:
You sell a the punch card for $100, you now owe the customer $100 worth of services (lets assume you close down tomorrow you would have to pay them back $100). So you have not made any money what so ever just like if you borrow $100 from a bank you did not make $100.
Every time they use the punch card you now owe them $10 less so you made $10, your profit is $10 minus whatever it cost you to provide the goods and services.
The fact that they n
Re: Accounting rules are craazzyy (Score:2)
It's not crazy. It's the basis of ALL accounting. You can't recognize something as yours still you offset it with your obligations. They meet the obligation one swipe at a time.
A loan is also cash you receive. Doesn't mean you made or own the cash, you just have it to use. There is a payback obligation.
No accounting isn't crazy (Score:2)
Accounting rules are crazy. Whenever I have something explained to me by an accounting, I'm often baffled at how it works.
No they aren't crazy. You just have to understand some basic principles.
Strangely (to me anyway), even though the organization got all $100 at once from their member when a card was bought, they only accrued income when a punch was used.
That's not strange at all. To understand it you have to understand double entry accounting [wikipedia.org]. Every transaction has two entries - a debit and a credit. Think of them kind of like and In and an Out - they have to balance. There are basically five categories of ledger accounts. Assets, Liabilities, Equity, Income, Expenses. Every transaction has a debit of an account in one of the five categories and a credit in an account of one of
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It all comes down to the contract. If a customer signs a five year contract, but they can break it after one year, it's a one year contract. If there is an early termination fee, the vendor can book *that*, if they have a process to reverse it upon contract completion, and if they have a history of not waiving the fee. Simply pre-booking income for the remaining four years is not acceptable.
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Thanks! It's good to hear from a subject expert. I'm hoping an "email lawyer" and/or "secrecy lawyer" can weigh in on you-know-who* one of these days.
I have a followup question. Subscription-based services have been around a long time. How are they typically dealt with in terms of estimated future revenue?
One probably has to use an estimated renewal rate to make accounting forecasts. For established products, one would expect a reasonable effort is made to find an "industry standard" rate for subscriptions
Aggressive accounting (Score:2)
But being "the cloud" is generally new, what would be an "acceptable" way to make an estimate for renewal rate?
Ahh, you've hit on the crux of the problem. With any new business model there exists the problem of trying to figure out what accounting practices are considered reasonable for that business. Usually this takes a bit of time and eventually there is usually guidance from the IFRS, IRS, SEC and other bodies for acceptable booking practices. Remember that GAAP stands for Generally Accepted Accounting Principles and much of GAAP (and IFRS even more so) is principle based rather than black and white rule base
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Maybe, but it could be technically legal and yet still unethical, in which case she will win her case. Even if there is no "fine." Or, she could win the case and they could be fined, sued, or investigated by the government. Firing people for raising ethical objections is a very dangerous thing. It is a much better idea to bribe them with a golden severance package so that they'll be happy to part ways and buy an island. Or just, you know, stop asking them to do unethical things. Have a special team for that
who woulda thought (Score:1)
Oracle Overcharges!
News at 11.
Who's really to blame here? (Score:3)
Is it Oracle, for allegedly inflating their sales numbers? Or is it the accounting firms that audit the books and sign off on it? I have no horse in the race, just an honest question.
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Is it Oracle, for allegedly inflating their sales numbers? Or is it the accounting firms that audit the books and sign off on it? I have no horse in the race, just an honest question.
If you knew Oracle you wouldn't even dare ask the question.
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I doubt Oracle themselves could even answer the question, even if they wanted to.
Speaking as someone who's dealt with their, for want of a better word, arcane fee structures.
Re:Who's really to blame here? (Score:5, Interesting)
Oracle is certainly to blame.
For the accounting firms, it depends on how good of a quality and nature of the lie is in the books. The accounting firm can only comment on whether the records they receive are consistent and have a correct process based on their inputs. If the wrong stuff is far enough upstream of the books, there's a GIGO problem.
Of course, by the time you reach that point, you've got even more blame on Oracle because then the intent to deceive becomes a lot more clear, since somewhere along the line folks (like the whistleblower in question) who put in that data have to be told to make shit up. Whether the point at which they were making stuff up is at a point a good audit would catch, I don't know. I am not an accountant, nor do I have any special insight into Oracle's bookkeeping process.
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A good auditor can often sniff out profit or expense inflation schemes. Inevitably, somewhere, there is actually a proper record of sales, because the senior management are going to want to know how well or how poorly the company is actually doing.
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And here is the dirty little secret about the accounting firms. All of them have a consulting practice to implement Oracle's ERP products. These firms (E&Y, Accenture, Deloitte) bring business to Oracle because companies will hire them to recommend an ERP (Enterprise Resource Planning - fancy software for HR and Finance that every big company uses) software. The choice usually comes down to Oracle, SAP or Workday.
So these very same accounting firms that get paid to recommend one product or the other are
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But how would they stay afloat?
Auditing (Score:4, Insightful)
The accounting firm can only comment on whether the records they receive are consistent and have a correct process based on their inputs.
That's not true at all. I'm an accountant and audits absolutely can and generally should investigate whether the records they review are factual and evidence based. In fact an auditor is supposed to look for evidence of fraud or mismanagement when doing a financial audit. If an accounting firm is not doing this when auditing the books for a large company then they are not doing their job properly.
If the wrong stuff is far enough upstream of the books, there's a GIGO problem.
That's when the auditor is supposed to decline to sign off on the books. Unfortunately audit firms have something of a conflict of interest. If they don't sign off on the books they might lose that client ($$$) and so they sometimes aren't are independent as they really should be.
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"That's not true at all. I'm an accountant and audits absolutely can and generally should investigate whether the records they review are factual and evidence based. In fact an auditor is supposed to look for evidence of fraud or mismanagement when doing a financial audit. If an accounting firm is not doing this when auditing the books for a large company then they are not doing their job properly." - Yes exactly right. An auditor is supposed to look for those sorts of irregularities. Otherwise what is the
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When an external auditor finds fraud, the audit is over. Rule of thumb is that a fraud audit requires at least 3x as many hours to perform (hopefully only covering a few sections of the business). The client is NOT going to pay for this. So unless the auditor is going to rubber stamp the audit, they need to work only minimal hours for the client while trying to get paid. Then refuse to continue.
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Under SOX (Sarbannes-Oxley), wouldn't Larry Ellison be personally responsible?
Both (Score:3)
Is it Oracle, for allegedly inflating their sales numbers? Or is it the accounting firms that audit the books and sign off on it?
The answer is Yes. As in both of them are at fault. If the auditing firm misses something big like that then they are potentially liable if Oracle really is inflating their numbers. Also the company management bears substantial responsibility as does the board of directors.
One thing to bear in mind however is that when an auditor signs off on the books they are NOT claiming that the books are absolutely correct to the penny. That would be impossible for a company of any significant size. What they are
Oracle ERP feature request (Score:2)
Dear Oracle,
Please add millions of dollars of accruals from expected business in to my Oracle ERP cloud account. Thanks.
Sincerely,
Drone CFO
Corporate Felonies are normal. (Score:2, Insightful)
My wife is a CPA and has changed jobs several times due to this kind of crap. the executives want the accounting department to lie on the books and fudge numbers.
She refuses to and has quit several places from time to time over this. Reporting it to the SEC every time. It's normal for executives to demand that laws be broken to make the books look better than they really are.
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RIAA / MPAA Accounting (Score:1)
They must use RIAA/MPAA Accounting practices.
ie:
We old 10 subscriptions, we did not sell 300M subscriptions, therefore 300M people are pirating, so we will declare a loss, but will sue 300M people, assuming all of them will settle, so we will book 600M worth for subscription revenue.
I'm going to use that on my taxes.
I made 100K, but people could have stolen that money from me, so I made $0. Gimme a refund, some more free money, gimme gimme gimme.
Accounting is murky anyway (Score:2)
I imagine that Oracle has internally justified their accounting methods simply because their business model is changing out from under them. In short, there are no guidelines so make up your own rules. The problem with Cloud is you're selling the customer the _potential_ to use a service in the future usually. Knowing when to book that as an actual sale seems to be hard with this model.
I'm not an accountant, but I've taken introductory accounting courses twice, once in the 90s and once pretty recently. It's
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Isn't that like insurance? They pay a premium each month, but you don't know when (or if) they'll make a claim.
If it's the situation where they pay a base fee for availability plus usage fees if they exceed a threshold that's just like having a plumber/lawyer/electrician on retainer and paying parts, labour above X hours,
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The problem with Cloud is you're selling the customer the _potential_ to use a service in the future usually. Knowing when to book that as an actual sale seems to be hard with this model.
Erm.. this is the basis for accrual accounting. Quoting from nolo [nolo.com], we see:
Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money out of your checking account, to record a transaction
It's pretty straightforward. Think of it like a gift card. The customer buys a gift card from Oracle, who then books the accrued income. As the customer uses the services, Oracle sends the customer a monthly invoice and deducts the invoice amount from the gift card. At this point, we can count the income.
What seems to have happened here is that Oracle looked for a way to fudge the figures. They figured that ErichTheRed was proba
Do we have this bubble's Enron? (Score:2)
Probably not, but...
If you remember the dot com bust, there were a few precipitating events that got everyone looking closer at sky-high valuations. Enron is probably the most important of those. While Enron wasn't a dot com, they used some very creative accounting practices to book revenue and inflate their value (innovative, disruptive, new economy, and all that). Their crash helped highlight the funny math going on at internet companies and helped get investors and regulators asking the hard questions.
Th
good old days (Score:1)
Cloud and subscription is just a return to the good old days of mainframes.
The corporation has the computer, the user has a dumb terminal.
Control has been taken from the user.
Remember the great revolution the IBM PC brought about ?
Well we're helping them to reverse the power balance.
Cloud (Score:1)
Is there Cloud bubble on the horizon as more of these issues come to light?