Accounting Irregularities

Accounting Irregularities

Samuel Aidoo

ACCT310-V2WW (S14)

Margaret Callender

June 8, 2014

Issue Identification

KIT Digital is one of the most recent accounting irregularities companies. KIT reported revenue of nearly $80 million that did not exist. In the months of November 2013 KIT Company made an announcement that it was restating its earnings in the last three years because of irregularities related to its revenue recognition from perpetual software license agreement that occurred in 2010 and 2011. KIT’s then management succeeded recording non existing revenue as a result of that management made employees to submit branch accounts to the headquarters in an Excel document instead of submitting in the company’s wide financial program. This enabled KIT’s management to manipulate the earning figures. According to some of the former employees, KIT paid commissions on unearned revenue to its employees; most of the commissions paid were from unearned revenues from customers and contracts that did not exist (blog.streamingmedia.com).

Authoritative Citation

The rule applies to the above identified issue that KIT digitals reported unearned revenue is the rule 605 Revenue Recognition. According to Financial Accounting Standard Board Concept revenue recognition must follow two factors: Revenue and gains should be realize and realizable. In order words revenues and gains cannot be recognized until realized or realizable. Financial Accounting Standard Board Concept number 5 paragraph 83 (a) states “revenues and gains are realized when products (goods or services) merchandise, or other assets are exchanged for cash or claims to cash.” Another factor that applies to revenue recognition is that revenue must be earned. The Financial Accounting Standard Board Concept Number 5 paragraph 83 (b), Recognition and Measurement in Financial Statements of Business Enterprise states “Revenue is not recognized until earned.” (www.fasb.org).

Analysis...