Encryption software market leader RSA Security (Nasdaq: RSAS) fell 12% yesterday as news spread that an independent financial research organization questioned a change in its accounting practices. It's important to consider the impact of any accounting change, and after looking at RSA's most recent 10-Q it's clear that the company has switched to a more aggressive method of recognizing revenue that should discourage investors.

During its most recent quarter, RSA began booking some sales after products were shipped to distributors. The change added $1.7 million to its total revenues of $76.7 million. Previously, RSA recognized revenue only after products were bought by end users. According to its 10-Q, RSA's relationships with certain distributors were strong enough that the eventual sale of products to end users was nearly guaranteed.

"Revenue from products is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, and collectibility is probable," the company said in the 10-Q. "As a result of the company's positive experience with returns from distributors, the company began recognizing revenue upon shipment to distributors rather than upon sell-through, resulting in an increase in revenue of $1,735 [million] for the three months ended March 31, 2001."

That may sound innocuous, but many companies have been burned doing just what RSA describes. Fellow software security vendor Network Associates (Nasdaq: NETA), for example, lost over $1 billion in market cap last December after stuffing its distribution channels with more inventory -- and booking it as sales -- than could be sold in a normal amount of time. It now only recognizes a sale once a product is sold to the end customer.

It's unclear why the change wasn't communicated to investors in the quarterly press release or conference call. By staying quiet, management looks like it was misleading investors. Even after the news yesterday, investors have still been left out in the cold. Will it recognize more revenue this way? Will it continue breaking out the amount of revenue the change adds? Many questions remain unanswered. (The company couldn't be reached in time for publication. If we hear from RSA, we'll publish the answers to those questions.)

While RSA's accounting practices are completely legal, the new accounting method is a reminder that investors should look for ways companies can overstate earnings. (Our February column on "Four Ways Investors are Tricked" is a great read.) Revenue recognition is a good place to start, and in the case of RSA its new policy increases the possibility of an earnings restatement down the road if deals fall through. The current uncertainty is enough to stay clear of RSA.

Mike Trigg wishes all Memorial Day travelers a safe journey. His holdings can be viewed in his personal profile. The Motley Fool is investors writing for investors.