What’s Wevenue? Case Study

Coopers & Lybrand was auditing Cal Micro at the time the latter company wrote off half of its accounts receivable. The move sparked an internal investigation and the Securities and Exchange Commission (SEC) sought to bar the two auditors working with Cal Micro from signing off on public company audits. On one hand, the SEC pointed to several weaknesses in the auditors’ performance of their jobs, while on the other the auditors claimed ignorance and even alleged a willful cover-up on the part of Cal Micro (MacDonald, 2000).

At issue in the dispute was Cal Micro’s failure to establish a guideline for when a transaction could be treated as a sale. The chief accountant of Cal Micro at the time testified that the auditors were asked, and actually approved Cal Micro’s practice of booking revenue on products sold but shipped after the close of the fourth quarter in June 1990 (MacDonald, 2000). Managers also booked revenue “for products shipped before customers even wanted them; they often didn’t reverse sales when customers returned goods; and they paid distributors ‘handling fees’ to accept products that sometimes had unlimited rights of return, then booked the products as sales” (MacDonald, 2000). Ultimately, this resulted in 70% of quarterly revenue in Spring 1994 being fake, and led to Cal Micro’s decision to write-off half of the accounts receivable (MacDonald, 2000).

Coopers & Lybrand was performing an annual audit at the time, and deployed to Cal Micro junior staffers with little experience (MacDonald, 2000). While the auditors’ attorney maintained that the generally accepted accounting principles do not require an audit of a write off, the sampling of Cal Micro’s transactions is also suspect. Coopers & Lybrand merely took 10 samples from the month of June alone, which is the last month of the fiscal year for Cal Micro.