Generally, The Street Inc. is an American digital financial media company that offers financial services and news to its customers. This company engaged in an “accounting failure” by filling untruthful financial reports in 2008 through reporting its revenue from deceitful transactions at a subsidiary that it had acquired the past year. The subsidiary co-presidents entered into false transactions with the friendly counterparties, which had either little or no economic substance. In addition, they fabricated and backdated the contracts together with other documents to facilitate fraudulent accounting. In addition, the company had reported its revenue before receiving it under the leadership of the previous chief financial officer.
The financial reporting of the public companies in US are supposed to conform to US GAAP, and especially Staff Accounting Bulletin No.104 (“SAB 104”), AICPA Statement of Position 97-2, Software revenue Recognition (“SOP 97-2”), and SOP 81-1.Under “SOP 97-2” and “SAB 104” rules, the basic revenue recognition standards include existence of a convincing evidence of an arrangement, occurrence of a delivery, determinable or fixed vendor’s fee, and collectability should be possible. The first 2 standards mentioned above relate to revenue being earned and the second 2 standards relate to revenue that is attained by a business transaction.
Therefore, these 3 accounting rules apply to the situation faced by The Street Inc. Each of the transactions that the company engaged in failed to meet either one or more of threshold standards under SOP 97-2 and SAB 104 as stated above (Bellandi 2012). For example, the company reported revenue before earning it hence this violated the mentioned standard or criteria of collectability. In addition, neither The Street nor the Subsidiary compiled with SOP 81-1since revenue was recognized regardless of the fact that the Subsidiary had made no actual progress toward projects completion. Moreover, in some instances, in violation of the Generally Accepted Accounting Principles, Ashman, the previous chief financial officer of the company recklessly or knowingly directed the staff to record, or recorded revenue, which didn’t meet the appropriate revenue recognition criteria.
Therefore, The Street shouldn’t have accepted revenue the way it did since by doing this it violated the above mentioned accounting rules. By doing so, accounting standards were not followed. The responsibility of an editor or an accountant in a situation like this is to ensure that the presented financial statements conform to the US GAAP. By The Street not following the accounting standards and violating the US GAAP rules, there was an accounting failure.
Bellandi, F. (2012). The handbook to IFRS transition and to IFRS U.S. GAAP dual reporting: Interpretation, implementation and application to grey areas. Chichester: John Wiley. Retrieved September 28, 2013, from http://www.worldcat.org/title/handbook-to-ifrs-transition-and-to-ifrs-us-gaap-dual-reporting-interpretation-implementation-and-application-to-grey-areas/oclc/797857951.
U.S Securities and Exchange Commission (2012, December 18). SEC.gov | SEC Charges Financial Media Company and Executives Involved in Accounting Fraud. Retrieved September 28, 2013, from http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171487024#.UkYqE9JkOGO