Place yourself in the shoes of a corporate CFO, the CEO and COO of the Telecommu
ID: 2557774 • Letter: P
Question
Place yourself in the shoes of a corporate CFO, the CEO and COO of the Telecommunication company you work for came to you with a brilliant idea (At least in their mind). They wanted to capitalize charges related to leasing local communication lines, which are needed to provide service to the companies customers. As the CFO of the company you had a meeting with these executives and realized that these lease charges are for monthly use of local communication lines and provided no future benefit. However, after the discussion with the executives you were in agreement with them and gave your approval to capitalize these lease charges.
Why did the COO and CEO want to Capitalize the charges?
Was the decision in accordance with GAAP?
How did this accounting change affect the financial statements?
Did this mislead the investors and creditors, How?
What would be the future consequence of this accounting change?
Explanation / Answer
1. COO and CEO wanted to change this becaue this would have reduced expenses and increased profits of the company
2. No, the practice is in violation of GAAP. It is the same practice which WorldCom Inc followed, the same lead to huge financial scandal
3. Accounting change lead to increase in profit, decrease in revenue expenditures and capitalization of lease expenses to be amortized later.
4. Yes, by showing them inflated and false profits
5. This may lead upto arrests by SEC under SOX Act for fraudlent accounting practices. Infact at the intitial stage, it would be reported by Auditors as wrong practice.