Financial statement fraud schemes commonly take the form of overstated revenue. That was indeed the case in a recent SEC investigation into the falsification of time records by certain professional services employees of Saba Software, a provider of cloud-based intelligent talent management solutions that had its IPO in 2000. According to the SEC, “[t]he improper time-reporting practices enabled Saba Software to achieve its quarterly revenue and margin targets by improperly accelerating and misstating virtually all of its professional services revenue during a four-year period as well as a substantial portion of its license revenue.”
For the applicable time periods, Saba reported annual revenue in the $100M to $120M range. As a result of the time record falsification scheme, revenue was overstated by at least 5% annually, resulting in a cumulative $70M overstatement of pre-tax earnings. From a GAAP perspective, Saba’s improper time-keeping practices precluded it from demonstrating VSOE and therefore required recognition of professional services revenues on a completed contract basis. In short, Saba recognized revenue earlier than it should have, which caused operating results to be materially misstated.
Although there was no indication that the company’s CFO was involved in the scheme, the SEC applied the “clawback” provision of Section 304 of the Sarbanes-Oxley Act of 2002, ordering that nearly $500,000 be reimbursed to Saba for stock-sale profits and bonuses. Separately, a former CEO also agreed to a similar “clawback” of $2.5 million last September, and Saba itself received a $1.75 million financial penalty in connection with the fraudulent accounting scheme.
As this SEC investigation illustrates, emerging and later-stage companies in the technology sector should be on the lookout for improper billing and revenue recognition practices, including premature and/or accelerated revenue recognition. As part of our Forensic & Valuation Services practice, Aronson LLC helps clients investigate financial statement misstatements and asset misappropriation schemes. To learn more about how our team of Certified Fraud Examiners can assist your organization, contact Bill Foote at 301.231.6299.
 A publicly traded firm until recently, Saba was taken private last month and is now owned by a San Francisco based private equity group.
 See SEC Order dated 2/10/2015 at http://www.sec.gov/litigation/admin/2015/34-74240.pdf. During the applicable time periods Saba actually employed two different CFOs; the $500,000 is a combined figure.