ACC 230 Week 7 DQ2 - that WorldCom may be trying to...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
WorldCom, Inc.'s behavior is comparable to Cisco's behavior from 2000-2004. In that instance, Cisco reported on its 2001 Form 10-K that it had a 21.8% increase in sales and a 25.1% decrease in receivable. The textbook tells us that, "if receivables decline, the allowance for doubtful accounts would decline as well." Doubtful accounts here means those accounts whose customers were in default and unlikely to pay their bills. Just as Cisco did not decrease (and in fact increased) its allowance for doubtful accounts, so WorldCom initially refused to decrease its allowance for doubtful accounts. By suddenly turning around in the third quarter of 2000 and telling accounting to write off $405 million in accounts receivable, WorldCom significantly increased the company's earnings report at the end of 2000. While Wall Street analyst viewed WorldCom's behavior as a one-time nonrecurring event, Cisco's prior behavior raises suspicions
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: that WorldCom may be trying to intentionally manipulate earnings numbers. At best, one must question the credit policy strategies of the firm, as this sort of reporting artificially raises the value of the company. As Cisco and Enron demonstrate, poor quality reporting can lead to manipulation of the market, profiting insiders while defrauding investors. The U.S. government has made an effort to improve the quality of reporting after recent financial scandals by passing the federal Sarbanes-Oxley Act of 2002. This Act created the "Public Company Accounting Oversight Board," charged with supervising the auditing process for public companies. In July 2003, the Securities and Exchange Commission issued a study recommending uniform accounting standards developed using a principles-based approach detailed enough to create a clear, operational standard resulting in greater transparency in financial reporting....
View Full Document

Ask a homework question - tutors are online