Shaun Snapp on Criminal Inflation of Revenue Prior to IPO

Executive Summary

  • It is common for software vendors to inflate their revenues and profits just prior to an IPO.
  • Learn why in many cases this can qualify as criminal intent.

Introduction

When software vendors are about to make an initial public offering, they will in many cases cook the books to make the revenues look as good as possible. The crime to be committed is fraud.

How Do Companies Artificially Inflate Revenues and Profits?

There are many tricks to revenue inflation.

  1. Push Off Expenses: It is very common for companies to push expenses until after the IPO. This makes the company look more profitable than it is. They do this knowing that they will incur those expenses later. Furthermore, some of those expenses may be necessary to be incurred pre-IPO, and pushing them after the IPO can have negative implications for operations.
  2. Bring Forward Deals: Deals can be brought forward, depriving post-IPO timeline of those deals. This is quite common.
  3. Push Harder for Short Term Bad Deals: Software companies can lower their standards of sale, which will increase sales…in the short term, but which will reduce the long-term viability of the implementations.
  4. Push the Sale Force Harder: This also has the consequence of increasing short-term sales before the IPO, but can cause long-term damage to sales as more experience salespeople leave post IPO, making it more difficult for the company to meet its long-term sales increases.
  5. Not Pay Out Sales Compensation that Was Agreed To: The incentives to bait and switch on sales compensation pre-IPO can be tempting. The reason being that salespeople take a high percentage of their income in bonus. And bonus plan can be altered while the salesperson is working, which is different than what was agreed to in the sales compensation plan originally. In extreme cases salespeople with a large amount of money due can be fired, to keep from paying bonuses, keeping more cash in the company, and again inflating actual revenues.

Conclusion

Software vendors employ a variety of tactics to inflate revenues and profits prior to an IPO. Some of the tactics are unethical, but others are illegal and fall into the category of investment fraud, and are therefore criminal in nature.

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