Fastly Makes $5.1 Million Accounting Error, Reveals New Control Deficiencies
Cloud platform also warns customers at risk of churning following outage are not using the platform at same level as before.
November 8, 2021
Earlier this year we warned of improper accounting at Fastly (FSLY), an edge cloud platform for processing, serving, and securing applications. Three months after our initial report the company's CFO resigned and shares had declined 41.9%. Since then shares have rebounded but the accounting problems and internal controls over financial reporting (ICFR) have worsened.
In its latest 10-Q, Fastly revealed $5.1 million in accounting errors in which it had been expensing certain items that should have been capitalized:
“We recorded out-of-period adjustments in the quarter ended September 30, 2021 to correct and capitalize certain internal-use software costs that were previously expensed of $5.1 million, of which $2.4 million and $2.7 million related to the quarterly periods ended March 31, 2021 and June 30, 2021, respectively. In the quarter ended March 31, 2021, $2.0 million and $0.4 million were previously recorded to research and development and cost of revenue, respectively. In the quarter ended June 30, 2021, $2.3 million and .$0.4 million were previously recorded to research and development and cost of revenue, respectively. The out-of-period adjustments are considered quantitatively and qualitatively immaterial.”
Not surprisingly, the accounting errors resulted in Fastly disclosing another material weakness over ICFR related to internal-use software costs:
“We also identified a material weakness in our internal control over financial reporting during the quarter ended September 30, 2021 related to our accounting for internal-use software costs. The material weakness resulted from a lack of timely and complete identification of internal-use software costs for capitalization, for which we recorded out-of-period adjustments in the quarter ended September 30, 2021.”
In our earlier report, we detailed that despite claims of progress, Fastly had unremediated control deficiencies dating back to 2017. In the current filing, Fastly assures investors it’s working cross-functionally to ensure its accounting team receives accurate information on a timely basis.
Earlier we mentioned shares had rebounded since our initial report, up approximately 25% from the low. The bounce was due, in part, because Fastly mentioned it had retained large customers it wasn’t sure it would following a platform outage the prior quarter. The latest quarterly filing confirms the customers were retained, but suggests they are not using Fastly’s platform as robustly as they once did:
“While these customers have returned to our platform, they have not returned, and may never return, to prior levels.”
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