PeopleSoft's Accounting Draws Critics

Allegations by OracleORCL that a controversial anti-takeover strategy being employed PeopleSoftPSFT is causing PeopleSoft to book revenue improperly might have some teeth, two accounting experts say.

The independent accounting experts think the issue might even warrant a look from the Securities and Exchange Commission. Oracle is trying to acquire PeopleSoft in a $7.3 billion hostile takeover bid.

"It's a prominent public company that's involved in an acquisition that is in an industry that has had problems with revenue recognition in the past," said Charles Mulford, director of the DuPree Financial Analysis Lab and an accounting professor at the Georgia Institute of Technology. "At the minimum, they [SEC officials] have to look at the transaction."

Jim Brendel, author of "Software Industry Accounting" and a partner at the accounting firm Hein & Associates, agreed. "I would think the SEC would be looking at it," he said. It's conceivable, in a worst-case scenario, that the SEC could require PeopleSoft to restate results, he said. But the matter is not clear-cut, so the agency also could conclude there's no problem, he noted.

At issue is a change in PeopleSoft's so-called "customer assurance program," in which customers are promised refunds of two to five times their license fees if PeopleSoft is acquired. Under a change made in the third quarter, PeopleSoft said the refunds would also kick in if a majority of its directors changed, according to an SEC filing. PeopleSoft stated that $155.9 million in revenue was collected with that change in place.

That means the refunds could be triggered even if PeopleSoft is not acquired, putting PeopleSoft -- and not an acquirer -- on the hook for the refunds.

Oracle CFO Jeff Henley charged in a conference call at the beginning of the week that accounting rules dictate that PeopleSoft should not have recognized the $155.9 million in revenue since it might have to be refunded by PeopleSoft. (It should be noted that anything that lowers the perceived value of PeopleSoft arguably redounds to Oracle's favor.)