4/6/2015 Scott Sullivan(right) CFO&CPA
1. Two General Accounting employees-Dan Renfroe and Angela Walter-made journal entries in the amount of $150 million and $771 million, respectively, without detailed support. It was noted that this was not out of the ordinary at WorldCom. In your opinion, was this a proper accounting practice? Explain. Normally at the end of each month, Worldcom would estimate the costs of using “Off-net” facilities and connections. Worldcom would accrue these liability estimates. Line cost accrual estimates were very difficult to estimate with precision, especially for international services. …show more content…
4. Consider the journal entry that recognizes $35 million of revenue in 2001 from the EDS contract based on WorldCom's expectation that the five-year required cumulative minimum payment would not be met. Based on your own analysis of GAAP, explain the propriety or impropriety of this journal entry.
It is as Scott Sullivan said himself in an email, “I do not think it is legitimate. Unlike the take or pay commitment, I believe this looks like a contingent asset and cannot be recorded until the final legal settlement.” And again due to pressures to close the gap, these EDS Ratable Accruals were recorded as revenues in the third quarter of 2001. According to GAAP, revenues are recognized when realized or realizable and earned. Here these revenues are not yet realizable. Collectability needs to be established with reasonable assurance.
5. Why do you think the professionals in this case, most of whom were CPAs, would agree to record a material journal entry contrary to their best professional judgment? Henry Schacht, Chairman of Lucent Technologies, stated in an unrelated interview with Fortune, "Stock price [should be] a byproduct; stock price
[should not be] a