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BKAL 3063(E) INTEGRATED CASE STUDY
30 SEP 2014
NIMELAN A/L MANOHAR 207110
NADIA BINTI ABDULLAH 213803
NAJIHAH SAKINAH BINTI MOHD NORDIN 213950
SURAYAH BINTI MATIASIN 214114

Accounting Fraud at WorldCom
Executive Summary
WorldCom is a telecommunication company that has been found by Bernard Ebbers, a Canadian. Growing rapidly through mergers and acquisition strategy, Ebbers handled largest takeover in US history by acquiring MCI, the nation’s second largest long distance company. The aggressive acquisition strategy required issuing a lot of debt, which eventually cause problems that attract the company to do accounting frauds. The main issue in this case is cooking the books, in which accounting misstatements were done intentionally. Cynthia Cooper, head of internal audit department, began to find out the fraud activities after she had requesting an explanation of doubtful $2.3 billion worth of projects. On 26 June 2002, SEC had filed a civil suit against WorldCom. WorldCom then announced for bankruptcy protection under Chapter 11 of the US Bankruptcy Code. Statement of Problems

WorldCom is just another case of accounting abuses and outright greed. Hence, the main issue in this case is none other than its accounting fraud. Cooking the books which is the act of falsification of accounting records so that company can provide a misleading picture of a firm's financial position is what they did. In terms of accrual releases, Myers has instructed acting CFO of UUNET to release line accruals and booked that entry even though it is not agreeable. Expense capitalization is another factor of cooking the books too as Sullivan was so determined to maintain the 42% E/R ratio. He decided to stop recognizing expenses for unused network capacity when they incurred, instead capitalizing them into an asset account, “construction in progress”. In order to win the board’s confidence, Sullivan had manipulated the information regarding capital expenditures and line cost during meeting with the board. Other issue is including the unhealthy company culture where WorldCom encouraged its employees to not question their superiors and simply do what they were asked. Employees often been threatened and warned if there have been some objections. Biasness occurred against those who worked in other department except financial, accounting and investor relation departments because Ebbers and Sullivan can easily granted compensation beyond the approved salary and bonus guideline for them. This condition was considered unhealthy, discouraging and thus create rivalry among departments. In addition to this issue, there are no written policies on corporate code of conduct to be followed. The third issue would be negligence in accordance to Generally Accepted Accounting Principle (GAAP). This involved how WorldCom make use of their accounting measures such as release of accruals and capitalization of expenditure. An accounting manager has been in questioned on how those accounting treatments were allow when he unable to find support within the accounting guidelines. The fourth issue found was poor decision making. Worldcom spent almost $60 billion and accumulated $41 billion in debt to finance the acquisition of companies, between 1991 and 1997. However in reality, those mergers and acquisitions required an integration of new and old organizations into a single smoothly functioning business. Unfortunately, the senior management did not address well several aspects in mergers and acquisitions as a result of over expansion and poor judgments. In addition, WorldCom decided to only focus building up revenue without a care of its total debt collection. Last but not least, the external auditor, Arthur Andersen is said to have conflicting interest issue with WorldCom. This can be explained through “the old-fashioned way” audit that had been conducted by Andersen as all recorded information will be assumed valid without further intensive investigation....
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