Accounting Fraud at Worldcom 3
Accounting Fraud at WorldCom
1) What are the pressures that lead executives and managers to “cook the books?”
After the rapid evolution of the telecommunication industry in the 1990s, WorldCom shifted its strategy to focus on building revenues and acquiring capacity sufficient to handle expected growth. Their biggest goal was to be the No. 1 stock on Wall Street rather than capturing the market share. As a result, their Expense-to-Revenue (E/R) Ratio was their measurement for their main objective (increase revenues and become the No. 1 stock on Wall Street).
Due to heightened competition, overcapacity and the reduced demand for telecommunication services at the onset of the economic recession and the aftermath of the dot-com bubble collapse, the telecommunication industry conditions began to deteriorate. Prices were falling and WorldCom had no option but to cut their prices as well. This action placed severe pressure on WorldCom’s most important measurement, the E/R ratio.
The E/R ratio was being affected due to revenue and pricing pressures while the committed line cost was still the same.
2) Is there a boundary between earnings management and fraudulent reporting? If so, what is it?
“Earnings Management is recognized as attempts by management to influence or manipulate reported earnings by using specific accounting methods (or changing methods), recognizing one-time non-recurring items, deferring or accelerating expense or revenue transactions, or using other methods designed to influence short-term earnings” (Akers).
We do not see any boundaries between earnings management and fraudulent reporting. Both actions will prevent the seeker-of-information (investors, Government … etc) from receiving consistent and non-tampered-with results. To use an analogy, murdering someone with a knife (earning management) or a gun (fraudulent reporting) does not add any substantial difference to the final situation; at the end of the day you have committed a murder.
Both
1) What are the pressures that lead executives and managers to “cook the books?”
After the rapid evolution of the telecommunication industry in the 1990s, WorldCom shifted its strategy to focus on building revenues and acquiring capacity sufficient to handle expected growth. Their biggest goal was to be the No. 1 stock on Wall Street rather than capturing the market share. As a result, their Expense-to-Revenue (E/R) Ratio was their measurement for their main objective (increase revenues and become the No. 1 stock on Wall Street).
Due to heightened competition, overcapacity and the reduced demand for telecommunication services at the onset of the economic recession and the aftermath of the dot-com bubble collapse, the telecommunication industry conditions began to deteriorate. Prices were falling and WorldCom had no option but to cut their prices as well. This action placed severe pressure on WorldCom’s most important measurement, the E/R ratio.
The E/R ratio was being affected due to revenue and pricing pressures while the committed line cost was still the same.
2) Is there a boundary between earnings management and fraudulent reporting? If so, what is it?
“Earnings Management is recognized as attempts by management to influence or manipulate reported earnings by using specific accounting methods (or changing methods), recognizing one-time non-recurring items, deferring or accelerating expense or revenue transactions, or using other methods designed to influence short-term earnings” (Akers).
We do not see any boundaries between earnings management and fraudulent reporting. Both actions will prevent the seeker-of-information (investors, Government … etc) from receiving consistent and non-tampered-with results. To use an analogy, murdering someone with a knife (earning management) or a gun (fraudulent reporting) does not add any substantial difference to the final situation; at the end of the day you have committed a murder.
Both