What's Revenue? by Elizabeth MacDonald: Article Analysis

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"What's Wevenue?"
Managerial Accounting

Article Summary
Unethical accounting practices can put a company, and its accounting firm, at the center of attention. California Micro Devices Corp (referred to hereafter as Cal Micro) was a chip manufacturer that decided to write off half its accounts receivables in August of 1994. This announcement not only negatively impacted their stock price, but it also triggered an investigation which uncovered many unethical accounting practices. One example of such practices included faking product shipments so that sales could be booked. By midsummer 1994, as much as 70% of quarterly revenue was false. The company had ignored early warnings, such as their auditor Price Waterhouse LLP telling them they had weak internal controls. After announcing their 1994 write off another audit took place by Coopers & Lybrand. While Coopers feels that their audit followed best practice, the SEC argued they missed many red flags. Due to this oversight, the SEC attempted to bar the two Coopers audit leads from ever signing off again on public company audits. There were many unethical practices that led to this situation. In the end, the Coopers auditors left to pursue other careers and the company hired Ernst & Young to re-audit their books. This led to the 1995 restatement of 1994 results. Ethical Analysis

Emphasis on short term results
When employees are put in a situation that is focused on short term results, it can cause unethical behavior because there is pressure to produce results. The article mentioned that Cal Micro managers had aggressive revenue goals. The pressure of reaching short term revenue goal created a situation that bred unethical behavior. Managers over-reached what should have been considered a “sale” by booking revenue for products shipped before customers wanted them. Managers also failed to reverse the sale once the product was returned. Furthermore, they paid distributors “handling fees” to...
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