WorldCom was the second largest long-distance company after AT&T before its bankruptcy. The company had a rapid growth by acquisitions of other companies just after it went public in 1989. Starting 2000 the telecommunication industry had a downturn and their stocks were declining. But WorldCom started doing some accounting frauds to prevent its stocks falling. Also CEO Ebbers made WorldCom to provide him cooperate loans so he could cover his margin calls that the bank were pressuring for. WorldCom did the fraud by capitalizing the costs rather expensing them and also inflating the revenues with improper accounting entries. Unfortunately the company’s cooperate culture wasn’t working in favor to prevent for a fraud and internal and external auditors weren’t working efficiently. By the time the accounting fraud discovered and WorldCom went bankrupt they had created $3.8 billion worth fraud and it was estimated that the company’s total assets were inflated for $11 billion. The company’s top executives who were involved in this fraud were convicted to a sentence in prison after a trial.
1- Explain the nature of accounting fraud.
It’s a criminal offence. Accounting fraud is falsifying and altering accounting records for financial gain. Committers of this fraud either overstate the company’s assets or understate its liabilities so the company seems financially stronger.
Types of accounting fraud
•Recognizing revenue in the wrong period or if it never existed •Round tripping
•Making false statements to regulators
•Keeping multiple books
•Adjusting sales figures (1)
WorldCom committed 11 billion dollar accounting fraud over a 3-year period. Over this period they understate the operating expenses by improper releasing of accruals and by improper capitalizations of operating expenses. The managers who involved in this knew the actions they took were illegal.
2- What are the pressures that lead...