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Chapter 4 Case study 2 dIlIgent: revenue reCognItIon proBlems 129
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yDIlIgent: Revenue RecognItIon pRoblems*
On 7 August 2013 the business press reported:
‘Software company Diligent delivered yet another
low to investor confidence with its admission its
financial accounts for the past three years and for the
March quarter are inaccurate and unreliable. After this
announcement Diligent shares fell to $5.80 from $8.20
in early June.’ [see Exhibit 1]
In a statement to the New Zealand Stock Exchange
(NZX), Diligent announced that it would restate
its financial statements for the fiscal years ended
31 December 2010, 2011 and 2012 and the fiscal quarter
ended 31 March 2013, and that its previously reported
esults for these periods should no longer be relied
upon. The New Zealand-listed US-based governance
software maker said it had mistakenly captured sales at
the beginning of the month rather than when contracts
were signed. Also, costs of software developed for the
company’s own use were reported inco
ectly. The
statement to the NZX also stated that the e
ors were
‘material for the purpose of requiring a restatement in the
company’s historical financial statements’.
On 17 October 2013 Diligent announced:
‘To date, no new material adverse revenue recognition
issues have been discovered during the restatement
process. However, the restatement process is very
complex and time consuming and involves reviewing
the recognition of revenue for approximately 20 000
transactions over the period covered by the restatement.
Diligent remains focused on completing the
estatement process and announcing its restated financial
statements and the preliminary half year announcement
as soon as possible. Diligent is working with its new
US independent registered public accounting firm,
Deloitte & Touche LLP to complete the reaudit of its
historical financial statements and has also engaged
additional external resources to assist with completing the
estatement process. Alessandro Sodi, Diligent’s President
& Chief Executive Officer, said “completing the restatement
quickly is one of the highest priorities in the Company
and the Board and management team are focused on the
completion of both the restatement and reaudit.” ’
Background: Diligent
Diligent Board Member Services, Inc. is headquartered
in New York, NY. In December 2007 it listed on the
NZX at $1 per share after raising $24m in an IPO. In
October 2010 Diligent announced the successful
completion of a NZ$1.86 million share placement of
three million ordinary shares at a price of NZ$0.62
per share. Diligent’s common stock trades on the NZX
under the symbol ‘DIL’ and is subject to NZX Listing
Rules. However, because it is incorporated in Delaware
with over 500 shareholders, it is also subject to the US
eporting and regulatory requirements of the Securities
and Exchange Commission (SEC) and the Securities
Exchange Act of 1934. SEC filings can be found on the
US SEC website, which includes financial reports (10-k
and 8-k filings).
Diligent has been consulting and hosting secure
websites for mutual funds, banks and insurance
companies since 1994. In 2000 it started developing
Diligent Boardbooks® an online software application
that boards, management and administrative staff use to
compile, review, update and archive board material during
and after board meetings. As at November 2013, Diligent
serves over 1950 registered users, over 85 boards, over
270 sub-boards, meeting groups and committees, and
over 60 corporations.
questIons
It is now early November 2013. Aaron Yu, a senior analyst
who covers the ‘finance & other services’ sector on the
NZX, picks up the 1 March 2013 update from Diligent
(see Exhibit 3) and reflects on their past problems and
future prospects.
*Michael Bradbury prepared this case. This case is intended solely as a basis for class discussion and is not intended to serve as an
endorsement, source of primary data, or illustration of effective or ineffective management. The research assistance of Jie Wu is
gratefully acknowledged.
Sue, W, Phillip, L, Palepu, Bradbury, & Healy 2014, Business Analysis and Valuation: Using Financial Statements - Text and Cases Asia Pacific Edition, Cengage Learning Australia,
XXXXXXXXXXMelbourne. Available from: ProQuest Ebook Central. [20 September 2020].
Created from swin on XXXXXXXXXX:11:42.
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DIL Share Price (Unadjusted)
(12/12/2007 to 30/09/2013)
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PART 2 Business AnAlysis And vAluATion Tools130
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y This is Diligent’s third recent accounting-related
emba
assment. In April, Diligent revealed that it had not
complied with new rules to be audited by a registered
auditor. It then changed auditors to Deloitte Touche
LLP from Holtz Rubenstein Reminick LLP. Before this,
Diligent’s remuneration committee was discovered to
have accidentally issued senior executives with millions of
additional share options to which they were not entitled.
A series of control weaknesses resulted in a public
censure by the NZ Markets Disciplinary Tribunal for
eaches of NZSX listing rules (see Exhibit 4).
Aaron wonders if other firms in the ‘finance & other
services’ sector on the NZX sector face similar revenue
ecognition problems. Aaron has noted that your recent
accounting qualifications would be useful in investigating
this issue. Aaron asks you to report on the following:
1 Diligent reports in both the US and NZ environment.
What are the differences (if any) between revenue
eporting under US GAAP and NZ GAAP
(international financial reporting standards)?
2 What are the likely accounting adjustments that
Diligent will have to make to restate its financial
statements? (Exhibit 5 summarises Diligent’s
financial statements.) In particular Aaron has asked
you to comment on the following statement by the
company:
‘The e
ors did not affect total revenues, the timing of
cash flows received, or the overall cash flow and liquidity
position of the company.’
3 How can we judge whether a firm faces revenue
ecognition problems? Undertake a literature
eview related to revenue recognition problems. In
particular, are revenue recognition problems related
to incentives to mis-report or other factors (such as
extreme growth)?
4 Assess whether firms in the same sector are likely to
face revenue recognition problems: Aaron suggests
you compare Diligent to Xero Limited. Xero provides
a platform for online accounting and business services
to small business and their advisers. It was started
in 2006, listed on the NZX in June 2007 and on
the Australian Securities Exchange in November
2012. Xero’s summarised financial data is reported in
Exhibit 6.
exhIbIt 1 stock price performance of diligent, december 2007 to september 2013
Source: NZX.
Sue, W, Phillip, L, Palepu, Bradbury, & Healy 2014, Business Analysis and Valuation: Using Financial Statements - Text and Cases Asia Pacific Edition, Cengage Learning Australia,
XXXXXXXXXXMelbourne. Available from: ProQuest Ebook Central. [20 September 2020].
Created from swin on XXXXXXXXXX:11:42.
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Chapter 4 Case study 2 dIlIgent: revenue reCognItIon proBlems 131
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yexhIbIt 2 time line of significant events for diligent from 2007 to 2013
Date Event
December 5, 2007 Listing
January 8, 2008 To announce $11 925 ahead of prospectus forecast for sale revenue for 2007 4th quarte
May 23, 2008 Announced the forecast revenue for June 30, 2008 ($ XXXXXXXXXX)
October 24, 2008 Announced a merger with Bridgeway Software, Inc.
December 5, 2008 Diligent will be subject to regulation by both the New Zealand Securities Commission and the US SEC. File quarterly
financial reports on form 10-Q and file annual reports on form 10-k
January 20, 2009 Spring Street to invest Diligent 2 M into new Diligent equity. ($0.1 per share)
January 27, 2009 Ca
oll Capital to invest US$1 million into new Diligent equity. ($0.1 per share)
January 29, 2009 Cancellation of 14M shares executed
March 30, 2009 Annual report for 2008. The revenue is $2.93 million, a growth of 70% to 2007
March 19, 2010 Annual report for 2009. Revenue is $5 million.
January 6, 2011 Diligent commences operations in the Asia-Pacific region
March 23, 2011 Annual report for 2010. Revenue is $8.3 million.
March 27, 2012 Annual report for 2011. Revenue is $17.97 million.
March 11, 2013 Announced Diligent is not aware of material information and results in a price increase of $1.42 or 26%.
March 19, 2013 Announced changes in consolidated statement of cash flow for 2012
May 13, XXXXXXXXXXQ report announced first quarter revenue is $15.1 million, a growth of 84% to 2012
June 20, 2013 Announced an e
or in a company revenue recognition practice
July 12, 2013 Announced a delay of second quarter 2013 update due to the need to complete its previously disclosed review of revenue
ecognition practices
August 6, 2013 Provides update on review of revenue recognition and intends to restate financial statements
Source: Diligent announcements to NZX.
exhIbIt 3 Information provided by diligent in their full year report released on 1 march 2013.
‘Fiscal Year 2012 was an outstanding year for Diligent Board Member Services, Inc. (“Diligent” or “the Company”) in terms
of New Sales, Cumulative Sales, revenue growth, margin expansion and profitability. The Company’s strong financial results
highlight its winning business formula, which in our view include: 1) a unique user experience, 2) a best-in-class multi-tenant
“Software-as-a- Service” (SaaS) offering, 3) market leadership, 4) a powerful, dynamic SaaS business model, 5) scalable
technology that easily adapts to customer requirements, and 6) superior customer