Joseph Rosenblatt writes:

>World Comm and [Tyco] were more
>interested in acquiring more than the were in producing their own products;

The WorldCom accounting problems are relevant to computer topics, so I've
removed the OT.

While the news coverage of WorldCom makes it look like an open-and-shut
case of fraud, there's probably less of that than the reader-hungry
reporters would have you believe. The accounting entries involved all
stem from the classification of expenses as either capital or operations.
There's a very thick, very grey line between the two, especially for
technology companies, and it can be hellishly difficult to decide which
category should contain a particular expense -- or whether it should be
split. And while some of WorldCom's expenses were clearly misclassified,
it apparently didn't start out that way.

Software development sits right in the middle of this thick grey line.
Some kinds of software development, such as for a product to be sold, may
be capitalized. But research is an expense, so it's necessary to separate
research from development. How easy is that to do in a software
engineering environment? What if the product is used internally? What if
internal-use software is later packaged and sold?

The rules for development hardware are just as murky. If I buy a
workstation to put on an engineer's desk for software development, that's
capital. But if I buy a second, identical machine for the engineer to
tear down and reverse-engineer, that's an operating expense. What if that
machine then gets put back together, with some improvements, and placed
on another engineer's desk? Or what about driver development, say, where
the machine is constantly in a half-operable condition, always out of its
case and with wires hanging out?

The bottom line is that there's often some judgement involved in these
calls. Unlike the Xerox case, where the company booked revenue that might
never materialize (though even that can be OK on occasion, as long as
it's done with recognition of the risk), WorldCom has exactly the same
income and expense streams as it did before the accounting adjustments.
it's just the names given to various expenses that have changed, but that
got them in trouble. Companies that do software development need to be
equally wary of the complexities of these rules.

-- Bruce




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