An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Ke Zhong
University of Texas at Tyler

Robert B. Welker
Southern Illinois University

Donald W. Gribbin
Southern Illinois University

Abstract: SOP 97-2 contained more restrictive revenue recognition rules for the licensing, selling, and leasing of software than its predecessor SOP 91-1. This study assesses whether the SOP changed revenue management and expense management within the computer software industry. A reduction in revenue management is expected. However, managers may have shifted to expense management to maintain its earnings management goals. Our results indicate that SOP 97-2 curbed revenue management and that software firms decreased R&D expenses after SOP 97-2. Bottom-line earnings management existed only minimally before and after the SOP. Revenue management may not fully extend to earnings because earnings changes from managed revenues may be offset by compensating changes in matched expenses and reductions in R&D expenses. The implication is that SOP 97-2 improved the consistency of revenue recognition practices, but it may have also increased the tendency to capitalize R&D expenditures.

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