Earnings Management - Accounting Red Flags
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Richard J. Wayman

Accelerating Revenue
This technique allows companies to record revenue in the current quarter (accelerating revenue) while delaying recognition of the related costs (delaying expenses) for several quarters or years. This can boost revenue for the early quarters, but if business activity slows (due to a recession), earnings will drop significantly as revenue growth falls and expenses remain unchanged.

Global Crossing is currently being criticized for selling long-term contracts (sometimes called indefeasible rights of use) that allow other telecommunications companies to use their fiber routes. Global booked the lump sum payment as revenue in the quarter it received the cash payment, although the service was, in fact, supposed to be delivered over a period of several years. Global also entered into separate contracts with another (or possibly the same) telecom to buy capacity on their fiber and recorded these costs as a capital expense that was spread out over the life of the contract (also several years) and which resulted in small quarterly expenses. In essence, Global was accounting for all the revenue from providing a service in a single quarter, while accounting for the cost of providing that service over several years. In general, watch out when revenue and costs for the same product are accounted for over different timeframes. In Global's case, companies were willing to enter into these contracts while the economy was booming and the dot-com bubble was growing. As both collapsed, these companies faced falling prices, excess capacity and nobody wanted to enter into any more long-term agreements. As a consequence, Global's and many other telecoms' revenue growth slammed to a halt and these companies now face high fixed costs or are forced to write off these expenses.