Worldcom Accounting Analysis

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WorldCom
WorldCom was a global communication company that provided data, internet and voice services. Their scope of operations was in over 200 countries on six continents. Their use of the internet as the communication network allowed them to shed geographic restraints and become one of the largest carriers of international voice traffic. WorldCom was incorporated in Delaware in 1972 as the Advantage Company, Inc. and was later reincorporated and operated out of Georgia where in 1993 there was a merger with Resurgence Communications Group Inc. and the company was renamed WorldCom, Inc. They were based in Ashburn, Virginia, the address of principal executive offices. WorldCom violated several acts regulated by the SEC which misled investors from as early as 1999 to the first quarter of 2002. According to SEC filings and new reports, the company’s failure to abide by GAAP resulted in improper accounting for material costs and caused an approximated $9 to $11 billion in overstated income on the financial statements. The most controversial accounting method WorldCom engaged in was its use of “line costs”. According to the SEC filing, “Line costs represent fees WorldCom paid to a third party telecommunication network providers for the right to access the third parties’ networks” (1). WorldCom transferred these costs to its capital accounts and did not disclose this to investors. Normally, the line costs would have shown up as an expense on the income statement and dramatically reduced the stated pre-tax income. They should have reported the line costs as expenses according to GAAP. By making this transfer the expenses were not accounted for on the income statement and inflated the appearance of their earnings on the income statement. This ensured that WorldCom investors would see performance metrics that were in-line with analyst projections. Bernie Ebbers was the CEO at the time the fraudulent activity was taking place within WorldCom. As the CEO, he...
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