Assignment # 3 Worldcom Accounting Scandal
Assignment # 3
WorldCom Accounting Fraud
By
Mark A. Cowan
Strayer University
ACC 499- Accounting Capstone
May 15, 2011
The purpose of this paper is to discuss the aspects of the WorldCom accounting scandal and the effects that this scandal had on the accounting world as we know it. We will discuss the corporate culture at WorldCom and how it contributed to the accounting fraud, how the CEO’s desire to be the #1 stock on Wall Street contributed to the fraud, pressures on accountants to book and release accruals to meet expectations, pros and cons of whistleblowing, and the creditability of the accounting profession when corporate fraud is revealed. First, we must look at WorldCom as a business standpoint. The driving factor behind this fraud was the business strategy of WorldCom's CEO, Bernie Ebbers. In the 1990s, Ebbers was clearly focused on achieving impressive growth through acquisitions. How was he going to pay for this acquisition binge? He paid for the acquisitions by using the stock of WorldCom. To accomplish this buying spree, the stock had to continually increase in value.
"... WorldCom pursued scores of increasingly large acquisitions. The strategy reached its apex with WorldCom's acquisition in 1998 of MCI Communications, a company with more than two-and-a-half times the revenue of WorldCom. Ebbers' acquisition strategy largely came to an end by early 2000 when WorldCom was forced to abandon a proposed merger with Sprint (NYSE: S) because of antitrust objections ..." (Federal Bankruptcy Report, 2002) The fraud was accomplished in two main ways. First, WorldCom's accounting department underreported 'line costs' (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them. Second, the company inflated revenues with bogus accounting entries from 'corporate unallocated revenue accounts. At the end of it all was financial gimmickry. The problem is
WorldCom Accounting Fraud
By
Mark A. Cowan
Strayer University
ACC 499- Accounting Capstone
May 15, 2011
The purpose of this paper is to discuss the aspects of the WorldCom accounting scandal and the effects that this scandal had on the accounting world as we know it. We will discuss the corporate culture at WorldCom and how it contributed to the accounting fraud, how the CEO’s desire to be the #1 stock on Wall Street contributed to the fraud, pressures on accountants to book and release accruals to meet expectations, pros and cons of whistleblowing, and the creditability of the accounting profession when corporate fraud is revealed. First, we must look at WorldCom as a business standpoint. The driving factor behind this fraud was the business strategy of WorldCom's CEO, Bernie Ebbers. In the 1990s, Ebbers was clearly focused on achieving impressive growth through acquisitions. How was he going to pay for this acquisition binge? He paid for the acquisitions by using the stock of WorldCom. To accomplish this buying spree, the stock had to continually increase in value.
"... WorldCom pursued scores of increasingly large acquisitions. The strategy reached its apex with WorldCom's acquisition in 1998 of MCI Communications, a company with more than two-and-a-half times the revenue of WorldCom. Ebbers' acquisition strategy largely came to an end by early 2000 when WorldCom was forced to abandon a proposed merger with Sprint (NYSE: S) because of antitrust objections ..." (Federal Bankruptcy Report, 2002) The fraud was accomplished in two main ways. First, WorldCom's accounting department underreported 'line costs' (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them. Second, the company inflated revenues with bogus accounting entries from 'corporate unallocated revenue accounts. At the end of it all was financial gimmickry. The problem is
References: Accounting Capstone, McGraw-Hill, 2010. CFO Magazine, WorldCom Whistleblower Cynthia Cooper, August 2008. Federal Bankruptcy, WorldCom, 2003. Free Dictionary