To my knowledge this 10-K includes the first critical audit matter, or CAM, issued by a Big 4 firm. The first of two CAMs is straightforward and does not reflect negatively on the company or its audit committee or cast doubt on its financial reporting. If anything, it most likely reflects an attitude by the auditor that we have to find something to protect us in the case of a PCAOB inspection.
The audit report provides:
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the Company’s Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.
Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
- Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services.
- Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.
- The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.
- Estimation of variable consideration when determining the amount of revenue to recognize (e.g., customer credits, incentives, and in certain instances, estimation of customer usage of products and services).
Given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company’s revenue recognition for these customer agreements included the following:
- We tested the effectiveness of internal controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration.
- We evaluated management’s significant accounting policies related to these customer agreements for reasonableness.
- We selected a sample of customer agreements and performed the following procedures:
- Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.
- Tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and variable consideration.
- Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.
- We evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services that are not sold separately.
- We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements.
The audit report also contains a CAM related to uncertain tax positions.