From 1998 until the third quarter of fiscal 2000,WorldCom, Inc. did not write off numerous accounts of customers who were in default and unlikely to pay their bills. In the third quarter of 2000,WorldCom management, who had earlier refused to approve any writeoffs, told the accounting area to write off $405 million of accounts receivable. Wall Street analysts viewed this write-off as a one-time nonrecurring event.
Explain the significance of this transaction to an analyst.
Explain the consequences of poor quality reporting.
What has the U.S. government done to improve the quality of reporting after recent financial scandals, such as Enron?
As an analyst, the $405 million write down would be significant because of the implications relating to unreliability of future earnings reports. Sure, the write down might have been viewed as a one time event, but the question would be raised, 'can this happen again in the future?' and 'why did this happen now?'. If an analyst looked at Worldcom's financial statements from 1999, the balance sheet clearly shows accounts receivables net of bad debt allowances for the two previous years, allowances that total more than 35% of current receivables. Especially considering the original 10-k submitted in 2000, the firm reported $440 million in bad debt allowance ...
The solution describes the effects of the WorldCom writeoff of $405 million of accounts receivables and the significance to analysts.