Oracle whistleblower suit raises cloud accounting questions

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Oracle whistleblower suit raises cloud accounting questions

Licensing revenue in the spotlight.

A whistleblower lawsuit filed against Oracle over its accounting practices underscores the pressures technology companies face to show that they are growing in the fast-moving cloud business.

The lawsuit, filed by former Oracle senior finance manager Svetlana Blackburn, revives longstanding questions about proper accounting when software and computer services are bought on a subscription basis rather than as a single package. 

Blackburn's lawsuit accuses Oracle management of pushing her to "fit square data into round holes" to make the vendor's cloud services' results look better.  

She alleges that her bosses instructed her to add millions of dollars of accruals for expected business "with no concrete or foreseeable billing to support the numbers". 

"We are confident that all our cloud accounting is proper and correct,” an Oracle spokeswoman said, adding that Blackburn worked at Oracle for less than a year and was terminated for poor performance. 

Blackburn does not use the word “fraud” in her lawsuit, and analysts say outright fraud is unlikely. 

An Oracle spokesperson did not immediately respond to a request for comment about the incentives. 

Questions about how revenue from cloud services are accounted for are becoming more urgent as companies including Oracle, IBM, Microsoft and SAP attempt to use cloud-based services to transform their businesses. 

Because cloud software is growing fast while traditional software sales slow, companies have an incentive to play up their prowess in the cloud.  

In quarterly reporting, many companies have begun to break out some measure of cloud revenue, including Oracle, SAP, Microsoft and Amazon.  

Accountants and analysts say that classifying software sales as cloud or traditional remains something of an art. 

“There’s some subjectivity in 'is it cloud, is it traditional software?,” said Steve Biskie, an auditor and co-founder of compliance consultancy High Water Advisors. 

The most nebulous part of cloud accounting concerns situations where the customer buys a product that can be used in a hybrid cloud environment. 

US accounting rules state that in cases when use is mixed, companies should allocate the revenue between traditional, or licensed software; and cloud, or hosted software. 

“Determining the fair value of the software license and hosting service may require the use of estimates,” the rules state. 

“Management should consider all relevant information, such as information from the negotiation process with the vendor, in estimating the fair value of the license.” 

There lies the grey area, says Enterprise Strategy Group analyst Dan Conde, and the point on which the Oracle lawsuit might hinge.  

“They can’t tell how much I use my own hardware,” he said. “Am I a casual user, or writing a lot on a computer? It then requires some guesswork there.”  

Software accounting issues have dogged companies for years, particularly subscription software businesses. 

Three years ago, the US Securities and Exchange Commission investigated IBM over how it reports its cloud computing revenue, an investigation that ended in 2014 with no enforcement action. 

Five years ago, Bernstein analyst Mark Moerdler took cloud CRM vendor Salesforce to task for financial practices such as how it accounts for sales commissions.  

An SEC inquiry over a similar issue, which ultimately led to the company restating its 2002 and 2003 results, contributed to a delay in Salesforce’s 2004 initial public offering.  

In 2006, software maker Computer Associates had to restate past financial results after an internal audit found issues concerning stock options and how the company booked some subscription revenue. 

Its former chief executive, Sanjay Kumar, pleaded guilty to securities fraud in 2006 and was sentenced to 12 years in jail.

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