Accounting
therefore immaterial." The materiality gimmick is one more method companies are using to stretch a nickel into a dime. Simply put, "In markets where missing an earnings projection by a penny can result in a loss of millions of dollars in market capitalization, I have a hard time accepting that some of these so-called non-events simply don’t matter," says Levitt. Finally, Levitt briefly touches on the complex issue of the manipulation occuring in revenue recognition. Modern contracts, refunding, delaying of sales, up front and initiation fees all add to the complications in some industries to follow specific rules of revenue recognition. With plenty of holes in revenue recognition the door is open for tweaking. Microsoft is a good example of the problems facing today’s companies. Concerned with proper revenue recognition, Microsoft started a practice in the software industry that allows companies to recognize revenue over a period of time. This recognition allows for better matching of revenues to future expenses generated by the sale of the software. Expenses such as upgrades and technical support are related to the revenue generated by the sale of the software but are incurred at a later date. The complexities of modern business transactions have left modern standards of accountancy years behind. Gimmicks, that all must be addressed by the financial community. The task of returning integrity to U.S. financial reporting is of paramount importance. The interests of our financial system are at stake. Arthur Levitt and the SEC "stand ready to take appropriate action if that interest is not protected. But, a private sector response that… obviates the need for public sector dictates seems the wisest choice." A nine part plan that involves the entire financial community is proposed by Levitt. Levitt has made it very clear that the SEC is prepared to start forcing change. A line Levitt hopes will not be necessary to cross. The SEC will begin to issue guidance on a wide array of issues concerning the credibility and transparency of financial reporting. Guidance that must be acted on to "Obviate" the need for large scale SEC involvement. The SEC will also act more proactively in two of its traditional roles of information regulation and enforcement. First, the SEC will begin requiring companies to provide additional disclosure details on changes in accounting assumptions. Supplemental beginning and ending balances and adjustments of sensitive restructuring liabilities and other loss accruals will also be required. Secondly, the SEC is unleashing the dogs on companies using any practices that appear to be managing earnings. The gauntlet has been thrown, and it is up to the financial community to accept the challenge. FASB and other standard setting bodies have fallen behind a rapidly changing and evolving economic environment. FASB and the AICPA are being coercively encouraged to clean up auditing and disclosure practices. The pressure is on and standard setting bodies are scrambling to close the holes in GAAP. FASB has established committees to investigate a number of concerns and is diligently working toward solutions that [next page]