Behind Closed Doors at WorldCom
Behind Closed Doors at WorldCom: 2001
1. Two General Accounting employees—Dan Renfroe and Angela Walter—made journal entries in the amount of $150 million and $171 million, respectively, without detailed support. It was noted that this was not out of the ordinary at WorldCom. In your opinion, was this a proper accounting practice? Explain.
Though this may not be out of the ordinary for WorldCom, this is not a correct accounting practice. The way the entries were made does not comply with the proper account practice according to GAAP. Detailed support is an important part of providing support to a journal entry and it explains the reason or purpose as to why the journal entry was created.
2. Based on GAPP, describe the propriety or impropriety of releasing of $150 million in line cost accruals in the Wireless division over Deloris DiCicco’s objections. Support your position using the authoritative accounting literature.
When instructed to reduce the Wireless Division’s line cost by $150 million due to savings from the prior period, DiCicco refused because there was no support for the entry. WorldCom would prepare an adjusting entry each month to recognize the estimated cost of the period as period expense, by capitalizing the expense as an accrued interest. According to GAAP, a line item cost must be reported as an expense on a company’s income statement. WorldCom capitalized the line expense, instead of expensing it and placed it on the balance sheet as an accrued liability rather than on the income statement as an operating expense.
3. On the topic of capitalizing line costs, critique the rationale included in CEO Scott Sullivan’s White Paper. Based on your own analysis of GAAP, explain the propriety or impropriety of capitalizing line costs in the telecom industry.
In the White Paper presented to the Board of Directors, the CEO Scott Sullivan supported the decision to capitalize line costs. Sullivan provided that the White Paper was in line with the
1. Two General Accounting employees—Dan Renfroe and Angela Walter—made journal entries in the amount of $150 million and $171 million, respectively, without detailed support. It was noted that this was not out of the ordinary at WorldCom. In your opinion, was this a proper accounting practice? Explain.
Though this may not be out of the ordinary for WorldCom, this is not a correct accounting practice. The way the entries were made does not comply with the proper account practice according to GAAP. Detailed support is an important part of providing support to a journal entry and it explains the reason or purpose as to why the journal entry was created.
2. Based on GAPP, describe the propriety or impropriety of releasing of $150 million in line cost accruals in the Wireless division over Deloris DiCicco’s objections. Support your position using the authoritative accounting literature.
When instructed to reduce the Wireless Division’s line cost by $150 million due to savings from the prior period, DiCicco refused because there was no support for the entry. WorldCom would prepare an adjusting entry each month to recognize the estimated cost of the period as period expense, by capitalizing the expense as an accrued interest. According to GAAP, a line item cost must be reported as an expense on a company’s income statement. WorldCom capitalized the line expense, instead of expensing it and placed it on the balance sheet as an accrued liability rather than on the income statement as an operating expense.
3. On the topic of capitalizing line costs, critique the rationale included in CEO Scott Sullivan’s White Paper. Based on your own analysis of GAAP, explain the propriety or impropriety of capitalizing line costs in the telecom industry.
In the White Paper presented to the Board of Directors, the CEO Scott Sullivan supported the decision to capitalize line costs. Sullivan provided that the White Paper was in line with the