In recent years, the Securities and Exchange Commission (SEC) has been waging a public campaign against corporate accounting practices that manage or manipulate earnings to meet the expectations of Wall Street analysts. Corporations engage in such practices in the hope of avoiding shortfalls that might cause serious declines in their stock price.
For each of the following cases that the Securities and Exchange Commission challenged, explain why each was a violation of the accrual accounting:
a. Lucent Technologies sold telecommunications equipment to companies from which there was no reasonable expectation of payment because of the companies' poor financial condition.
b. America Online (AOL) recorded advertising as an asset rather than as an expense.
c. Eclipsys recorded software contracts as revenue even though it had not yet rendered the services.
d. Xerox Corporation recorded revenue from lease agreements at the time the leases were signed rather than over the lease term.
e. Knowledge Ware recorded revenue from sales of software even though it told customers they did not have to pay until they had the software.