Why IT Is Prone To Accounting Scandals

Last week brought a familiar story: Infrastructure management vendor Peregrine Systems Inc. plans to cut almost half its workforce, just a month after reporting accounting irregularities that led it to overstate revenue by up to $100 million.

Why do these problems keep hitting the IT industry? Robert O'Connor, president and CEO of revenue-management software company Softrax Corp., said at a Chicago conference on financial reporting that there's a legitimate challenge for IT companies to track sales generated through complex contracts in an environment where business models often shift. But he also blames practices such as companies swapping software with another vendor and booking it as a sale. "Look online at who some of these companies say their partners are and who their customers are, and it's the same list," O'Connor said.

There's a trace of good news in all of this, says Robert Burson, a Securities and Exchange Commission enforcement officer in Chicago. The fallout from recent accounting irregularities has made investors--who once blindly accepted what companies told them as long as their portfolios grew--more skeptical. Adds Burson, "Finally, the investors care a lot about the integrity of financial statements."