Would Your FP&A Forecast Survive an Audit? | Norm Osumi
Norm Osumi discusses critical alignment issues between accounting and FP&A teams, focusing on revenue recognition definitions, EBITDA adjustments, and how forecasts are used as evidence during audits. He emphasizes that unsupported revenue growth assumptions pose the greatest audit risk and that accounting and finance must work closely together to maintain consistent definitions and reasonable support for all numbers.
Summary
The episode explores three major areas where accounting and FP&A frequently miscommunicate or diverge: revenue recognition, EBITDA adjustments, and forecast audit risk.
On revenue recognition, Norm illustrates how a $144,000 SaaS contract containing $120,000 subscription and $24,000 implementation services can be recorded differently. FP&A might book $24,000 revenue immediately upon implementation completion and amortize subscription over 12 months at $10,000/month. However, accounting may treat implementation and subscription as a single deliverable, resulting in $12,000/month revenue. The distinction hinges on contract structure and whether components are interdependent. Norm recommends comprehensive contract reviews between accounting and finance for large deals to ensure alignment and prevent surprises.
Regarding EBITDA and non-GAAP measures, Norm explains that definitions vary by company but smaller firms sometimes aggressively exclude recurring costs (legal fees, restructuring charges) that larger or public companies would include. The key test is whether costs are unusual, non-recurring, and circumstance-specific. If a company restructures annually, it becomes difficult to exclude those charges. Norm notes that aggressive add-backs may work for private companies initially but create problems during audit or due diligence, where acquirers may ignore the adjustments and include costs in their EBITDA calculations.
The most significant risk area involves forecasts used as audit evidence. Osumi explains that revenue projections are the most critical input in discounted cash flow models, affecting goodwill impairment testing, going concern assessments, deferred tax valuations, and stock compensation calculations. He recounts an auditor requesting five years of purchase orders to support growth assumptions—a request he views as unrealistic for most tech companies where pipeline visibility rarely extends beyond 18 months. However, he emphasizes that companies must document clear, reasonable assumptions supporting their revenue growth, whether through specific customer POs, new product launches, or other tangible evidence. Auditors increasingly scrutinize forecasts by examining actual pipeline, customer acquisition patterns, website engagement trends, and historical churn to determine if projections align with observable data.
Sarah reflects that she previously received no feedback from accounting about forecast audit findings, suggesting either strong forecasting practices or lack of communication. She acknowledges changing her perspective on forecast accuracy metrics, now viewing them as valuable in certain contexts—particularly for public company quarterly guidance—while emphasizing that forecasts must be supported by business owner conviction and operational feasibility rather than arbitrary targets. Norm's main takeaway emphasizes that accounting and FP&A must maintain tight communication and trust, working collaboratively on transaction definitions so no surprises emerge later.
About this episode
A forecast can be useful for running a business and still lack the evidence needed to defend it. What happens when accounting and FP&A report different revenue numbers for the same month, and the disagreement comes down to how a contract is interpreted? In this episode of FP&A Today, Sarah Schlott welcomes Norm Osumi to explore the judgment calls that sit between financial reporting, business performance and forward-looking forecasts. Through a SaaS revenue-recognition example, Norm examines why bookings, billings and recognized revenue are not interchangeable, and how implementation fees and sales commissions complicate the picture. The conversation then turns to EBITDA and adjusted EBITDA, where excluding recurring expenses or making aggressive add-backs can change the story a business tells about its performance. The central question is what happens when an FP&A forecast becomes evidence for an auditor, lender or investor. Norm discusses an auditor requesting five years of purchase orders to substantiate future revenue and explains why assumptions around growth, customer activity and the sales pipeline need to be reasonable and documented. For smaller finance teams, the lesson is not to build more elaborate models. It is to understand which numbers matter, what supports them and when to bring accounting into the conversation. Key Moments Recognized revenue, bookings and billings serve different purposes. A sound FP&A forecast needs to account for the underlying revenue-recognition rules. SaaS implementation fees and subscriptions can produce different monthly revenue outcomes depending on the contract and performance obligations. Sales commissions raise both operational and accounting questions, especially when bookings, revenue and related costs fall into different periods. Adjusted EBITDA requires judgment. Recurring expenses cannot simply become one-time adjustments because excluding them creates a more attractive result. Forecasts can become part of an audit, valuation or financing process. Assumptions may need to be supported by customer activity, purchase orders and a credible growth pipeline. Smaller finance teams still benefit from documenting the handful of assumptions that materially drive their forecasts. Repeated misses against publicly communicated financial projections can damage management's credibility. FP&A and accounting need shared definitions, clear communication and a process for challenging assumptions before numbers reach external stakeholders. Timestamps 05:42 - Why FP&A and accounting can recognize different revenue amounts 09:04 - Bookings versus billings versus recognized revenue 12:21 - How smaller companies should approach accounting for sales commissions 16:46 - EBITDA and the judgment behind adjustments 21:14 - GAAP, non-GAAP and adjusted EBITDA reporting 28:08 - When an FP&A forecast becomes audit evidence 33:33 - What auditors look for in forecast assumptions 36:45 - Documenting assumptions that support revenue projections 42:15 - Does forecast accuracy actually matter? 45:13 - Rapid fire with Norm Osumi Earn CPE Credit If you would like to earn CPE credit for listening to the show, visit: https://earmarkcpe.com/fpa Download the app, take a short quiz, and get your CPE certificate. Further Reading/Listening Related FP&A Today episode: The $100M Revenue Mistake Everyone Missed, with Devon Coombs https://www.devoncoombs.com/
Key Insights
- Revenue recognition outcomes depend on contract structure—whether implementation services are independent or integral to software usability affects whether revenue is recognized immediately or amortized, requiring joint accounting-FP&A contract review to prevent divergent treatments.
- Smaller companies often exclude recurring costs (legal fees, annual restructuring) from adjusted EBITDA, but this approach creates audit and due diligence risk because acquirers and auditors typically ignore aggressive add-backs and reinclude expenses in their calculations.
- Revenue is the most critical and audit-vulnerable input in DCF models because it cascades into goodwill impairment testing, going concern assessments, deferred tax valuations, stock compensation, and covenant calculations—making aggressive or unsupported revenue assumptions the highest audit risk.
- Auditors request detailed evidence for growth assumptions (such as five years of purchase orders) that may be unrealistic or impossible to produce, requiring companies to push back and explain growth through tangible evidence like specific customer commitments, product roadmaps, or observable market data instead.
- Sales commissions under ASC 606 must be capitalized and amortized over the contract life (often 2-5 years based on historical customer retention), not simply expensed when paid, creating timing differences between cash outlay and accounting recognition that FP&A must understand.
- Forecasts submitted as audit evidence face scrutiny for reasonableness by comparing projected revenue growth against observable metrics like actual pipeline, customer acquisition patterns, website engagement trends, and churn rates to detect misalignment between claims and operational reality.
- Accounting and FP&A teams often fail to communicate changes or findings related to forecast audit issues back to operational leadership, creating blind spots where forecast problems discovered during audit never inform business planning or corrective action.
- Business owners must personally believe in and understand the mechanics of their own forecast numbers—if leadership cannot articulate a credible pathway to achieve a 30% growth target through specific actions or changes, the number lacks validity and won't be achieved regardless of formal approval.
Topics
Transcript
you said growth was 6%, it only came in at 3%, and you do that for, let's say, a couple of quarters, you could lose credibility pretty quickly, right? So if your revenue number is very difficult to support with some assumptions, I think that's your biggest area of potential audit risk. If you would like to earn CPE credit for listening to the show, visit earmarkcpe.com. Download the app, take a short quiz and get your CPE certificate. And if you enjoy listening to FP&A Today, please leave a rating and review. And now onto the show. From Data Rails, this is FP&A Today. Interesting conversations today. The story of our guest who had an auditor ask him for…
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