1. What is earnings management? The companies use earnings management as a strategy by which they can easily control and manipulate their earnings to reach their pre-determined earning target. 2. Why do companies employ earnings management techniques? Accountants cannot predict every business structure‚ every new and innovative transaction. Therefore‚ they build up principles that allow for flexibility so that they can adapt to changing circumstances. However‚ people make use of that flexibility
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company. These factors continually impact the planning process performed at each level of management. An organization that neglects to establish and monitor plans can become disorganized and ultimately lose control of practices performed throughout the corporation. A prime example of poor planning due to disregard of legal‚ ethical‚ and social issues were the executives employed at WorldCom. Before 2002‚ WorldCom was one of the top telecommunication businesses in its industry because of many acquisitions
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gross outflows incurred in generating revenues. (ii.) SCON No. 6‚ paragraph 148‚ states that costs should be expensed when they are used up or have expired and when they have no future economic value which can be measured. SCON No. 6‚ paragraph 178-181‚ states costs should be capitalized or recorded as assets when the costs have not expired and they have future economic value. b. According to GAAP Accounting Principles‚ cost capitalization is observed if a major expense merits recognition as
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Q 1 Explain the nature of accounting fraud? A1. Background: The origin of WorldCom can be traced to the breakup of AT&T in 1983. The company began as Long Distance Discount Services Inc during 1983. LDD name was changed to WorldCom in 1995. To build the economies of scale that were critical success factor in long distance market it was imperative for WorldCom to grow its available volume off bandwidth as it lowered the per unit costs. Also the Telecommunication act of 1996 permitted long
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CASE NAME: WorldCom: Keeping Planes In the Air 1. Briefly describe the important aspects of the situation. WorldCom had asked its accountant to make accounting entries dipping into reserves to help the company to meet its earnings target. WorldCom had been done these financial reserves for three quarters and intended to do so thereafter. The telecommunications industry was in a severe slump. WorldCom had a slow growth and rising cost. Vinson‚ who had done WorldCom’s accounting
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Earnings management is typically regarded as a bad thing. I will cover why it’s considered a bad thing‚ and what it entails. When an executive “cooks the books” it’s referring to them providing false information in order to deceive other important employees or shareholders. This act includes‚ but is not limited to: falsifying receipts‚ inventories‚ balance sheets‚ and/or cash flow statements. This is an important concept to familiarize yourself with because‚ if identified and stopped in time‚ could
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Worldcom appeared to be a great success story. However‚ the success began to unravel with the accumulation of debt and expenses‚ the fall of the stock market‚ and long distance rates and revenue. It would take 2 years for the extent of these problems to become public‚ and accounting scandals like that of Worldcom would make history in the finance and telecommunication areas. While the intent is to make money to benefit a person or a group of people through illegal acts while disguising their illegal
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reported earnings and the reasons behind each way may be different. (1) Report lower earnings. Managers intend to report lower earnings for mainly three reasons. Firstly‚ they want to hide profit for future use. In some years‚ the company presents a strong performance and has earned huge profit; however the manager may worry that the company’s future performance would not be as strong as current year‚ which gives them the incentive to save the profit by reporting a managed lower earning‚ so that
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Accounting Fraud at WolrdCom Introduction WorldCom‚ US second largest telecommunication company shocked the world by filing bankruptcy at 21 July 2002. The WorldCom filing surpassed Enron and became the largest bankruptcy filing in United States history. Due to its rapid growth‚ WorldCom is also heavily in debt as they finance the company growth with debt. The collapse of WorldCom did not just affect their employees‚ retailers‚ the government but also bankers. WorldCom was a multi-billion dollar telecommunications
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needed to worry about but rather the management of the company‚ and the tactics and behaviors that would ultimately lead to the downfall and closure of the company. One of the most famous was Enron‚ but another well known failure was that of WorldCom. WorldCom was a big player in the telecommunications industry‚ being the largest telecom carrier of Internet traffic. In 2002‚ WorldCom joined the ranks of failed companies mostly because of the tactics that management and its accountants used to show
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