Assignment # 3 Worldcom Accounting Scandal

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Assignment # 3
WorldCom Accounting Fraud

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 that the more one resorts to this sort of deception, the more complicated it becomes to continue it. Deception is just not sustainable in the long run. Complicating Ebbers' situation was an industry-wide downturn in telecommunications. During this time, Wall Street had continuing expectations of double-digit growth for WorldCom. After all, they had achieved so much in such a relatively short period of time. However, WorldCom needed time for its management to catch up to its newly acquired companies and learn how to run and manage them. Unfortunately, Ebbers did not have the courage to tell Wall Street that WorldCom needed time for the consolidation and digestion of its acquisitions. In order to satisfy Wall Street's expectations, Ebbers had to doctor his company's books. If he had had the courage to tell them what was really needed, WorldCom would be alive today and Ebbers wouldn't be facing the prospect of spending the rest of his life in prison. Another major factor driving this fraud was Ebbers' very apparent desire to build and protect his personal financial condition. For this reason, he had to show continually growing net worth in order to avoid margin calls on his own WorldCom stock that he had pledged to secure loans. Ebbers was an egotistical individual. He had a desire to be number 1 in everything that he did whether in the business world or individually. His ability to deceive other led to the debacle of the WorldCom accounting scandal. The accountant will sometimes be asked or even will take it upon himself to book and release accruals to meet expected goals of the company. It would be easy to accomplish this using the accrual method of accounting. In accrual accounting, “by their very nature require a certain amount of estimating, judgment and discretion.” (Accounting Capstone, 432) Therefore, earnings manipulation that operates within the accrual accounting and GAAP has no effect on total income over the life of the...
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