WorldCom Takes Another $3.3 BILLION Write-Off !

FOX News Channel | August 8, 2002 | FOX News Channel Staff

[TheCPA]

Yes, accounting estimates and revisions of accounting estimates are inherent in accounting. The main subject of my doctoral dissertation was whether oil and gas companies attempted to smooth their ending quantities of proved oil and gas reserves through revisions of previous estimates.

Spending cash for assets (capitalized costs) would be shown in the investing section of the statement of cash flows. Had WorldCom treated the line costs as operating expenses, the expenses would have reduced net income, which is the major item in the operating section of the statement of cash flows.

[TheCPA]

However, companies often must treat items differently on their tax returns and financial statements. The rules are not always the same. A company must estimate bad debts expense for the financial statements before a specific account is identified as uncollectible. The tax law (Code Sec. 166) allows a bad debt deduction only when a specific account is identified as partially or completely worthless.

[TheCPA]

The real issue on reversing amounts added to the Allowance for Bad Debts is whether there is evidence to support such treatment. Did WorldCom start having fewer bad debts because of a tighter credit policy or was the amount in the Allowance account too high based on the company's experience in writing off uncollectible accounts? While estimates are inherent in accounting, the esimates must be reasonable. In addition, for financial reporting purposes, accountants are supposed to be conservative when there is any doubt. Still, government and the press should stop treating changes in accounting estimates as criminal conduct. While the public might perceive that net income is an exact number, such is not the case at all. Different companies could apply different estimates, different judgments, and different accounting principles to the same transactions and report two different income numbers. Both numbers could be acceptable under generally accepted accounting principles.

[lavaroise]

Fair enough. Thanks for the info.

[Taliesan]

Thanks for your expertise on this thread. My undergraduate degree is accounting and I've been watching news reports of all the "fraud" and thinking there is some actual fraud being uncovered but also a whole lot of media drama over routine accounting in a frenzy of nail-the-rich-white-guys.

Lay people hear that some company revised their earnings from 2 years ago and gasp "They lied to us!".

Well, maybe not.

[fivetoes]

$2 Billion More in WorldCom Errors- CNBC

Yet another misleading headline. These people intentionally shuffle these monetary lies. Which word do you think ought to be in the headline, errors or fraud?

The American Heritage® Dictionary of the English Language:
error NOUN: 1. An act, assertion, or belief that unintentionally deviates from what is correct, right, or true. 2. The condition of having incorrect or false knowledge. 3. The act or an instance of deviating from an accepted code of behavior. 4. A mistake.
fraud NOUN: 1. A deception deliberately practiced in order to secure unfair or unlawful gain. 2. A piece of trickery; a trick.

[MeekOneGOP]

With MCI's mindless customer service agents and fraudulent business practices, they deserve to go down...

Let me share a personal rant I have with them. Four years ago, Ming had to go to China. We had just met. Right after she left, I had an MCI salesman call with a 3 month promo for overseas LD. Current rate was $1.31/minute, their promo was for $.81/minute. So I signed up. The bill comes in at $1.31. I called MCI to get it corrected. Their reply? They had no salesman by the name of the guy that called me and they would NOT credit me for the difference. I was blown away. Any good company would have fixed it, but they were adamant that I'd pay it or they'd hurt my credit! (That's what they told me). I paid it, I dumped MCI and I badmouth them with this true story every chance I get.


With MCI,

WorldCom = WorldCON !

< /rant >
ah!.....i feel much better now !

[aShepard]

However, setting aside over $2 Billion in doubtful account reserves, against $10 billion in "current assets" (Worldcon doesn't provide a breakdown of current assets) is setting aside 20% for doubtful collections.

Either they have a total deadbeat customer base, or the $2 billion setoff is there to smooth the income stream so as not to upset the markets.

And, I'm still waiting for them to provide a writedown of the $400 million Ebbers loan, as it's collateralized by his stock that is now worth $3 million.

[TheCPA]

According to WorldCom's balance sheet as reported in its 2001 Form 10-K (http://www1.worldcom.com/global/investor_relations/annual_reports/2001/2001annual.pdf), the consolidated current assets were $10,324 million. On page 69, the Form 10-K states as follows: "As of December 31, 2001, our accounts receivable balance was $5.3 billion, net of allowance for doubtful accounts of $1.1 billion." This means that their accounts receivable were $6.4 ($5.3 + $1.1) billion and their allowance for doubtful accounts was $1.1 billion. Thus, the allowance for doubtful accounts was over 17 percent of its accounts receivable. I do believe that WorldCom has said that its 2001 financial statements will be revised and that users should not rely on previously reported amounts.

[aShepard]

I was looking at the september 2001 Q, where only current assets were disclosed

[aShepard]

And, if the gross a/r was maintained at $6.4B in past years, and in the past they had a reserve of $2B, they had a reserve of over 30%. Where was AA to pour holy water over that accounting???

[TheCPA]

The higher the bad debt "reserve," the more CONSERVATIVE is the accounting. "Reserve" is an archaic term in financial accounting. It is correctly used only to indicate an appropriation of retained earnings. Yet, the press and some accountants still use the term. It is archaic because it creates a false impression in the minds of the reader. The correct term for this account is the allowance for doubtful accounts or something very similar.

[aShepard]

The higher the bad debt "reserve," the more CONSERVATIVE is the accounting

Sorry, disagree. The CPA is to test the appropriateness of the doubtful account allowance based on the aging of current receivables, the past history of uncollectible accounts, and the trend of the economy in the clients business sector. Unjustified huge allowances should not be allowed to accrue.

[TheCPA]

The higher the allowance, the lower is the reported assets and stockholders' equity. Being careful not to overstate assets or revenues and not to understate liabilities or revenues is the basic definition of the application of the doctrine of conservatism.

[TheCPA]

My post should have said, inter alia, not to understate expenses to be conservative.

[Tuor]

What difference does it make how much they lied about.

What matters is who was in bed with them and who knew what. Just because these guys are sunk, those they associated and who may have aided and abetted may *not* be sunk.

It's about how this came about and who else might be involved that interests me about this, not about how much more bankrupt WorldCom can get.

Tuor

[MeekOneGOP]

LOL ! I love that little animated coffee FReepin' image. I found that yesterday.

Feng Shui? It that better than beer?, lol!
See my little rant on #67? hehehe It's absolutely true too......

[MeekOneGOP]

So, in your opinion as a CPA, did WorldCON act with ill intent or did they just make poor judgments? Is that what the real issue is?........

Thanks for your input.

[TheCPA]

I do not know whether they acted with bad intent or just made bad judgments. I would want to see the evidence. It might be a mixture. If a company is doing badly, I would expect the managers and accountants to look for ways within GAAP to boost earnings. GAAP leaves a great deal of latitude. Did they go too far with the intent to deceive? I would not make that judgment without more evidence.

[MeekOneGOP]

Thank you.....