Credit And Collection Corporation

Case Study: Credit and Collection Corporation

Karen Allen

Financial Analysis and Planning

Mr. Hindman

April 5, 2005

Credit and Collection Corporation (CCC) is looking to offer stocks to a group of private investors. CCC manages and collects accounts receivables for three different types of customers. CCC uses a local CPA firm to prepare and given an opinion on its financial statements. To improve the favorability of the equity offer CCC has determined it needs an opinion on its financial statements from one of the Big Six CPA firms.

The first type of accounts receivable CCC purchases are delinquent accounts. CCC reviews a company's delinquent accounts receivables, removes problem and bankrupt accounts from the list and then assumes collection responsibility for the collection for a management fee of 30 percent. The second type of accounts receivables are current and delinquent accounts receivable. CCC reviews a company's accounts receivables then pays the company 95 percent of the value of the receivables selected. Any uncollectible accounts are exchanged with the company for new receivables or are purchased back from CCC by the company. The third type of account receivables are payments due to hospitals, clinics and doctors from third party payers. CCC reviews the accounts receivables to determine the amount that the third party payer will actually be paying. The provider is then paid 95 percent of the determined value and CCC collects from the third party payor. For each type of accounts receivable CCC generates dun letters and does follow-up collection calls.

The first Big Six CPA firm spend several days interviewing CCC personnel and studying the financial data. The CPA firm determined they has serious reservations about revenue recognition. The CPA firm stated CCC was in the collections business and should recognize revenue only after accounts had been collected. The firm based its findings on concept statement number 5. Concept statement number 5 states an item must meet the definition of a financial statement element, the item must have a relevant attribute measurable with sufficient reliability, the item must contain information capable of marking a difference in user decisions, and the information must be verifiable, representationally faithful and neutral. Therefore, revenue should be recognized when realizable and earned. The firm compared CCC's business to "real estate accounting rules required the deferral of revenue from a real estate sale, so long as the seller had any continuing involvement with the development of the property sold."(Corporate, 99) The firm did not think CCC earned its revenue until after it had sent out the dun letters, made the follow up calls and collected on the account. The firm wanted to restate CCC's financial statements showing a net loss for last year and the year prior. CCC argued that it was not in the collection business but sold a process to its customers. The process included the original evaluation of the accounts receivable before purchase. CCC contacted a second Big Six CPA firm.

The second Big Six CPA firm followed the process as the first. It interviewed CCC personnel and reviewed the financial statements. This firm had a different conclusion about the recognition of revenue. It cited concept statement number 6, which states " assets are probable future economic benefits as a result of past transactions or events"(Corporate, 101). The firm compared CCC's business to "life insurance accounting where the insurance companies recognize revenue as it is received from the policyholder (even if premium is paid up front), less the costs of writing the policy, and less the present value of the benefits provided by the policy." (Corporate, 101) The firm concluded CCC did not need to defer the