A Detailed Report on Improper Accounting Practices at SuccessFactors

This report provides an in-depth analysis of the improper accounting practices at SuccessFactors, a cloud-based human resource software company. The report examines the alleged manipulation of multiyear contracts to inflate revenue figures and the parties affected by these unethical practices. It explores the use of non-GAAP financial measures, their usefulness to investors, and their limitations compared to GAAP. The report also discusses the measures that can be taken to prevent improper accounting of multiyear contracts, including establishing internal controls, conducting audits, and promoting ethical behavior within the organization. Furthermore, the report analyzes the impact of SAP's acquisition of SuccessFactors and the implications for the IT industry and investors. The conclusion emphasizes the importance of robust internal control mechanisms, ethical guidelines, and proper training for employees to prevent fraud and maintain investor confidence. The report recommends developing strong internal control systems, regular audits, and employee training to ensure ethical accounting practices and prevent future instances of improper financial reporting.

Ethics and Professional Practice
1

EXECUTIVE SUMMARY
The current report aims to discuss the issue of improper accounting of multiyear contracts
faced by the company SuccessFactors. It aims to discuss which parties are affected by such
improper and fraud accounting within the business. It also discusses the financial measures
available with the company, instead of GAAP and other accounting rules. These rules and
guidelines can enable a company to inform investors about the business and its happenings in a
better as well as efficient manner. The report will also throw light on the decision made by SAP
to purchase SuccessFactors. Whether the same has turned into profitable decision or not will be
analysed under the current report in an effective manner.
2

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................4
MAIN BODY...................................................................................................................................4
1. Alleged improper accounting and who was hurt with the same.........................................4
2. Non-GAAP financial measures and its usefulness to investors.........................................5
3. Measures to be taken for prevention of improper accounting of multiyear contracts........6
CONCLUSION................................................................................................................................7
RECOMMENDATION...................................................................................................................7
REFERENCES................................................................................................................................9
3

INTRODUCTION
Following proper and effective accounting policies is essential for the overall growth as
well development of business in an effective way. SuccessFactors is a US based company which
is engaged in the business of providing cloud based human resource application software. The
company is having revenue of around 206 million dollars in the year 2010. The current case
study will discuss the accounting mistreatment or manipulation that is being done by the
management of company and this has hurt the sentiments of investors of the company (Mujib,
2018). SAP, a German based software corporation has acquired the company in the year 2012,
by paying around $3 billion for the company which has posted losses, since its inception. The
current report will discuss the various aspects of this case including the impact of accounting in
such situations.
MAIN BODY
1. Alleged improper accounting and who was hurt with the same
A sales person reported to the authorities that co-workers were improperly writing the
contracts to make the company like it were expanding, which was an unethical thing to do. No
one got hurt by the alleged improper accounting, maybe just the whistle-blower because he
snitched them out. SuccessFactors was reporting the SEC without the backlog figures, and
claimed that investors did not find it useful. The intention of these sales people was to make sure
the company appears to grow faster than the actual growth. Though, there was misleading
accounting that is being done by the company, but no one was hurt by such improper accounting
policies and procedures (D'Cruz and Bjørkelo, 2016). While making the purchase of company,
SAP has conducted its own investigation for the purpose of knowing as to how the backlog
numbers are missed, this case has acted as a eye opener for various kinds of firms in the same
industry and it has impacted the IT industry as a whole.
However, it was a great lesson for investors as well, who were engaged in rewriting the
existing contract and showed it as a new one, despite the fact that client was not a new customer.
From now on, they will have to focus more carefully on revenue and customer number, so that
no improper accounting can take place and unnecessary mistreatment of contracts can be
prevented in future. It is essential to make sure that right kind of business policies and
4

procedures are adequately followed by the management of companies and a level of ethics is
maintained.
Cases like such can help other companies in the same industry to learn as to what issues
may arise in their business and how the same should be resolved in an effective manner. It is
quite important to have a proper ethical mechanism within an organisation for prevention of such
improper accounting as incidents like these shakes investor confidence and also tarnish the
overall reputation of the firm in longer run (Visser, 2014).
It will difficult to analyse every time as who is the main culprit behind improper
accounting of contracts and transactions. It is a long term process and it requires genuine efforts
from the side of management to ensure proper mechanism that will detect fraud and error at the
earliest.
2. Non-GAAP financial measures and its usefulness to investors
Non-GAAP financial measures are being used by companies and their management for
the purpose of understanding and comparing the operating results in accounting. The same is
also used for the purpose of calculating bonus payments, to evaluate management’s overall
financial performance etc. These Non-GAAP financial measures are provided by the
management of company to the investors, it acts as a supplement to the reported result of the
entity. These measures are regarded as meaningful to investors as the company through this tries
to review the cash flow generated from the operations, which is an essential aspect of the
business operations.
The use of Non-GAAP financial measures have their own limitations, this is because
these financial measures do not reflect all the items of income as well as expenses, therefore the
cash position of an organisation cannot be ascertained properly and effectively. Therefore it can
be said that non-GAAP financial measures cannot be used for the purpose of assessing the
financial position and the real operations of a concern. It cannot be a substitute for GAAP, it
should see in isolation (Ismail and Yuhanis, 2018).
Thus, it can be said that these measures can be adopted by organisations. Non-GAAP is a
useful tool for the company because it tracks financial records and successful project outcomes.
Investors can benefit from it because it can show results for operations success, bonus payments,
financial performance, and losses. So, yes, management should encourage the reporting of non-
GAAP to investors.
5

Though there are various kinds of accounting guidelines which are there in place. These
guidelines come from internal sources like IASB or GAAP. These are accounting rules framed
by accounting bodies on an international level, but sometimes a fraud can take place by
deceiving such standards and guidelines. Then, the importance of non-GAAP financial measures
suddenly increases. These measures can enable effective as well as efficient reporting to the
investors (Manning and Soon, 2016).
3. Measures to be taken for prevention of improper accounting of multiyear contracts
Management should encourage employees to go to seminars about ethics. There should
be a chief ethical officer who can handle complaints and whistle blowers in an orderly fashion
way. Company should conduct audits of its own and hire auditors from outside as well to review
financial records and assess risks associated with accounting.
There are various kinds of measures that can be adopted by an organisation for the
purpose of avoiding and preventing any kind of improper accounting of contracts in the business.
One of the steps that can be taken by the management of the company includes establishing a
system of internal controls that will enable management to assess the risk that may be associated
with the accounting department. Once these internal controls are set up, they should be verified
properly in a timely manner to check out whether it functions properly (Sherif, Pitre and Kamara,
2016).
There is a need that an employer must do periodical check of all the contracts that are
there including the customer numbers, revenue as well as other main factors that are essential for
the purpose of avoiding any kind of fraud to take place within the organisation in longer run. For
the purpose of assessing these contracts, the company can follow the process of random
sampling as well; this is because it might be a difficult task for the management to go through
with each and every contract that are being issued to the customers. It is also very important to
make sure that there is a proper system in place (Latan and Noonan, 2017). The system will
ensure that ethics are being followed by the employees of company and if any employee is
unable to follow the ethical guidelines and regulations, then a system of punishment will be in
place as well to punish the same.
Periodic training and development of employees should be done by the management of
the company to make sure that the ethical foundation of employees is strong enough. Yet another
way of ensuring ethics can be job rotation of employee on a regular basis, this will make sure
6

that same employee is not on same job for too long, thereby reducing the chances of
misbehaviour from the side of employees in an effective way (Singh and Bussen, 2015).
Use of technology is yet another way through which a company will be able to detect any
fraud that may take place in the business. If a transaction is placed or made with malicious
intention to make monetary benefits at the cost of company, the same can be detected
automatically within the software. If there will be digitisation, then it reduces the role of humans
in the business, and higher productivity with less defects in goods manufactured can be seen, in
case of manufacturing businesses and in case of business of IT services, proper technology will
give competitive edge to the company and it will improve the reputation of the organisation
within the market in longer run. (Owolabi, 2018).
CONCLUSION
From the above discussion, it can be concluded that SuccessFactors, as a company, is not
able to survive because of many reasons. The company did not have proper internal control
mechanism to protect any kind of fraud that may take place within the business. The improper
accounting of multiyear contracts within the company was taking place from a long period of
time. Therefore, it is quite clear that the numbers posted by the company on regular basis for
years was not true and are fabricated by the company to build a reputation in the market. There is
a need that non-GAAP financial measures are used by management of companies to inform
investors about what is happening within the company and how this may affect them and their
investment decision in the longer run. The purchase done by SAP of SuccessFactors has
benefited the company and it is making profits with the purchase made by the company.
RECOMMENDATION
It is recommended to companies like SuccessFactors that right kind of internal control
mechanism should be developed within the business. This ensures that any transaction that takes
place within the business is accounted properly and there are less chances of fraud or error that
may be conducted by an employee or team of employees. It is a long term process but there are
certain measures that need to be taken by the company, so that right kind of ethical guidelines
can be formed and this will prevent any unethical cases to take place in the business. It is also
suggested for the companies to focus more on their internal control system, as the primary
responsibility to detect any fraud or error rest with the management of the organisation.
7

However, management also somehow depends on an effective internal control system to detect
any fraudulent transaction to take place in the business. Proper training and development of
employees are also essential for prevention of any fraud. They shall be trained to perform well
for the company and should keep themselves away from any improper accounting or
mistreatment of any transaction. Regular auditing on quarterly basis should be done of all the
transactions as well as multiyear contracts by the business.
8

REFERENCES
Books and Journals
Cui, W., 2018. Taxation without Information: The Institutional Foundations of Modern Tax
Collection. U. Pa. J. Bus. L., 20, p.93.
D'Cruz, P. and Bjørkelo, B., 2016. Sociocultural dynamics in whistleblowing: insights from
India. Asia-Pacific Journal of Business Administration, 8(2), pp.143-162.
Ismail, S. and Yuhanis, N., 2018. Determinants of ethical work behaviour of Malaysian public
sector auditors. Asia-Pacific Journal of Business Administration, 10(1), pp.21-34.
Latan, H. and Noonan, R. eds., 2017. Partial least squares path modeling: basic concepts,
methodological issues and applications. Springer.
Manning, L. and Soon, J.M., 2016. Food safety, food fraud, and food defense: a fast evolving
literature. Journal of food science, 81(4), pp.R823-R834.
Mujib, A., 2018. SHARIA FRAUD MODEL: THE FRAUD IN THE CIRCLE OF FAITH.
UNEJ e-Proceeding, pp.275-285.
Owolabi, H., 2018. Public accountability: The case of government guarantee scheme in
PFI/PPP projects (Doctoral dissertation, University of the West of England).
Sherif, K., Pitre, R. and Kamara, M., 2016. Why do information system controls fail to prevent
unethical behavior?. VINE Journal of Information and Knowledge Management
Systems, 46(2), pp.251-266.
Singh, N. and Bussen, T.J., 2015. Compliance Management: A How-to Guide for Executives,
Lawyers, and Other Compliance Professionals: A How-to Guide for Executives,
Lawyers, and Other Compliance Professionals. ABC-CLIO.
Visser, W., 2014. The Failure of CSR 1.0. In CSR 2.0 (pp. 21-34). Springer, Berlin, Heidelberg.
9