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SEC Charges Arizona-Based Software Company for Inadequate Internal Accounting Controls Over Its Financial Reporting

Washington D.C., Sept. 25, 2014

The Securities and Exchange Commission today sanctioned a Scottsdale, Ariz.-based software company for having inadequate internal accounting controls over its financial reporting, which resulted in misstated revenues in public filings.

An SEC investigation found that JDA Software Group Inc. failed to properly recognize and report revenue from certain software license agreements it sold to customers because its internal accounting controls failed to consider information needed for determining a critical component of revenue recognition for software companies.  If companies are unable to demonstrate this component – known as vendor specific objective evidence of fair value (VSOE) – when determining the fair value of certain services related to a software license agreement, then they cannot immediately recognize the entire revenue from that agreement.  With proper internal controls that appropriately considered VSOE, JDA would have recognized revenue from certain sales ratably over the term of a services agreement.

JDA agreed to settle the SEC’s charges by paying a $750,000 penalty.

“Companies must have adequate internal accounting controls designed to comply with their financial reporting obligations to the public,” said Michael Maloney, Chief Accountant of the SEC’s Enforcement Division.  “VSOE is a critically important component in determining the timing in which software companies recognize revenue, and JDA’s internal accounting controls surrounding VSOE were inadequate in various ways.”

According to the SEC’s order instituting a settled administrative proceeding, JDA’s internal accounting controls surrounding VSOE were inadequate in several ways.  For example, JDA lacked adequate revenue recognition policies and procedures and failed to identify all service-related contracts needed for VSOE testing to determine the fair value of certain services.  Moreover, JDA did not have sufficient internal accounting controls to determine whether a software license agreement and related services contract were linked to each other.  As a result of these internal control failures, some of JDA’s financial statements for 2008, 2009, 2010, and 2011 were materially misstated.  JDA restated those financial statements in August 2012, reporting that it had overstated its revenue for fiscal year 2010 by 4 percent and overstated EBITDA by approximately 18 percent.  In connection with the restatement, JDA identified control deficiencies that constituted a previously undisclosed material weakness in its internal control over financial reporting related to revenue recognition.

The SEC’s order finds that JDA violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, and 13a-13.  In agreeing to settle the charges without admitting or denying the SEC’s findings, JDA consented to the SEC’s order imposing a $750,000 penalty and requiring the company to cease and desist from committing or causing any violations or any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13.

The SEC’s investigation was conducted by Noel Gittens and William Scarborough and supervised by Antonia Chion and Ricky Sachar.


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