British software companies fear accounting fall-out

Concerns over the way technology companies report profits, after the accountancy blunders of the Enron scandal, are about to engulf the UK software sector.

Leading industry figures claim discrepancies between UK and US accounting practices could mean British companies are substantially overstating revenues.

The revelations, based on generally accepted accounting procedures known as "Gaap", are already being investigated by the Accounting Standards Board (ASB), which is expected to issue new rules later this year.

Richard Gaunt, co-founder of software company Autonomy, said: "The bottom line is that $1 of revenue under US Gaap is a lot more than $1 of revenue under UK Gaap."

Because Autonomy has a dual listing in New York, the company files its accounts under the US rules. "Retail investors may not know the differences between the two systems and therefore reported UK gross margins could be very misleading," said Mr Gaunt.

The discrepancies between the two systems are centred on the way software companies can book income from software and services supplied to customers.

Under US rules, revenue can be included in companies' accounts only when software and services have been supplied in full. But UK companies can book revenues for supplying services before the work is finished.

John Higgins, director-general of trade body the Computing Services and Software Association, said that on top of the inconsistencies, international software companies find it hard to conform to the dual standards.

"We have been told by our members that to comply with one set of standards, they almost have to break the spirit of the others," he said. "We would like to see the playing field levelled to give confidence to software companies' accounts."

Some British software companies are already preparing to switch their accounting to the US system to reassure investors. Sherwood International said it hoped to move to US Gaap "within 12 months".

As part of this, the company said it would restate revenues for the past two years using US Gaap. Last June, Cedar recalculated its revenues under US rules. This showed that turnover was £27m, compared to £36m under UK Gaap.

Last month the company was rescued from bankruptcy by Alchemy Partners.

Mary Keegan, chairman of the ASB, said: "UK Gaap may not be specific enough in terms of revenue recognition. We will address this issue in the second half of this year." But she added that the more prescriptive US standards could lead to "loopholing".