SEC, DOJ investigate CrowdStrike deal with reseller Carahsoft

US feds are reportedly investigating a $32 million deal inked by CrowdStrike with a government reseller to provide cybersecurity tools for the Internal Revenue Service (IRS) — products the agency never used and said it didn’t even purchase.

On the last day of Q3 2023, the security giant signed a contract with top government software reseller Carahsoft Technology Corp. for use of its identity threat detection software by the IRS, according to a Bloomberg report. The timing seems to be a critical component of the investigation, as the transaction was large enough for CrowdStrike to meet Wall Street expectations for the quarter.

Given that IRS usage hasn’t materialized, some, including, Bloomberg said, CrowdStrike’s own employees, have raised concerns about pre-booking — the inflation of sales figures to meet investor expectations.

However, a CrowdStrike spokesperson told Computerworld: “We stand by the accounting of the transaction.” Carahsoft did not reply to Computerworld’s requests for comment.

IRS: We never purchased CrowdStrike software

According to two people who spoke with Bloomberg on agreement of anonymity, investigators for the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have been conducting interviews with CrowdStrike and IRS staff and collecting records related to the deal, including written documents exchanged between IRS, CrowdStrike, and Carahsoft employees.

Investigators are asking witnesses about any interactions between CrowdStrike sales staff and IRS employees, and have repeatedly queried whether the agency purchased CrowdStrike software, to which they’ve repeatedly been told “no”, according to the anonymous sources.

Previously, CrowdStrike and Carahsoft said they had settled on a “non-cancellable order,” but they haven’t said whether there was indeed a purchase order in place from the IRS.

After the deal was finalized and CrowdStrike reported its third quarter results, company shares jumped 10%. CEO George Kurtz even seemed to call the deal out in the quarterly earnings call, saying that “identity threat protection wins in the quarter included an eight-figure total deal value win in the federal government.”

However, several months later, CrowdStrike appeared to backtrack, excluding roughly $26 million from its annual recurring revenue, citing a federal distributor’s intent to exercise transferability rights.

Carahsoft, for its part, has been under scrutiny for some time now. The FBI searched its Reston, Virginia headquarters last year in a matter related to another partner, and federal prosecutors are performing a separate civil investigation into whether the company conspired to overcharge the government.

Pre-sales a ‘leadership problem’

Experts and analysts say the CrowdStrike-Carahsoft narrative emphasizes the pressure placed on enterprise IT buyers and sellers to sign deals before end-of-quarter (EOQ).

“Quarter-end deal pressure is one of the most predictable yet high-stakes dynamics in enterprise IT negotiations,” Adam Mansfield, commercial advisory practice leader with IT negotiation advisors UpperEdge, told Computerworld.

Vendor sales reps push hard to lock in revenue, typically tied to new product adoption, upgrades, or expanded usage, before closing their books, he said, “often dangling so-called ‘once-in-a-lifetime’ aggressive discounting to secure commitments.”

Scott Bickley, advisory fellow at Info-Tech Research Group, agreed. “Buyers have been conditioned by vendors who are publicly traded to strategically position deals at EOQ and preferably at the end of the vendor’s fiscal year,” he said.

But while urgency can create opportunity, it also carries significant risks, Mansfield pointed out. Committing to products and/or volumes that aren’t fully vetted, and misalignment of contract terms, can later cause financial damage, particularly when these new products come with non-cancelable subscriptions.

“The practice often creates more problems than it solves,” agreed SaaS and service brand consultant Chad Perry. “Deals get ‘booked’ under false pretenses, contracts get renegotiated (or canceled) post-quarter, and the next thing you know, the company is explaining ‘revenue recognition issues’ on an earnings call.”

While, at the end of the day, the blame may land in the sales department, “pre-booking is never just a sales problem,” he said. “It’s a leadership problem.”

Buyers’ opportunity in EOQ deals

For buyers, EOQ deals can both exploit and be exploited, experts point out.

In the case of IT buyers, understanding this pressure can actually be a strategic advantage, Perry noted. “If you know the seller is under quarter-end stress, you have leverage,” he said. “You can negotiate better terms, push for extras, or even delay and see what they offer to close.”

Mansfield emphasized that the key for IT buyers is to seek out opportunity in vendor urgency, while at the same time maintaining control. This means ensuring pricing is truly competitive and securing proper concessions (such as protections). The worst-case scenario: Committing to costly products and fees only to see plans unravel due to business shifts, internal delays, lack of realized value, or vendor-side complications.

“Smart buyers use quarter-end pressure to their advantage, but never let it dictate the terms of their agreements,” said Mansfield.