The WorldCom Accounting Scandal

Topics: Enron, Generally Accepted Accounting Principles, Accounting scandals Pages: 5 (1418 words) Published: October 26, 2014
The WorldCom Accounting Scandal
WorldCom was started in Mississippi as a long distance telephone service provider in 1983 (Lyke and Jickling, 2). Over the next decade and a half, the company expanded to offer a whole range of telecommunication services through a series of mergers and acquisitions (Lyke and Jickling, 2). At its height, WorldCom was the largest long distance phone company in the United States and was one of the leading companies in the telecommunication market in the world, providing both local and long distance telephone services, internet service, data and web hosting to businesses (Lyke and Jickling, 2). As the dot-com bubble began to burst and the economy was entering a recession, WorldCom, like a number of other telecommunications companies, faced financial troubles (Lyke and Jickling, 2). Under the pressure of declining profit and market expectations of continuing growth, top management at WorldCom began to manipulate its accounting reports in an attempt to avoid or delay market losses (Lyke and Jickling, 1). Accounting fraud was committed in mainly two ways. First, over $3.8 billion of “line cost,” or payment made to other companies for use of their communication networks, was classified as capital expenditures rather than current expenses (Lyke and Jickling, 2). Since expenses were understated and capitalized expenses were treated as an asset, WorldCom was able to increase both its net income and asset and cover up the fact that the company had actually been experiencing net losses. This maneuver also allow WorldCom to spread out its line costs over future years, as capitalized expenditures are depreciated over their lifetime (Lyke and Jickling, 3). On June 25, 2002, WorldCom made the public announcement about this misclassification and that it would be restating its financial statements for 2001 and the first quarter of 2002 (Lyke and Jickling, 1). In August, further audit and investigation revealed that the company had also been manipulating its reserve account, affecting another $3.3 billion (Sandberg and Pulliam). Reserves are normally set aside by business to cover estimated losses such as expected uncollectible payments from customers, among other things. When bad debts are collected, businesses reverse the reserve accounts and increase revenue and earnings accordingly. WorldCom was revealed to have been inflating its reserve accounts in order make reserve reversals later to boost earnings (Sandberg and Pulliam). The accounting irregularities at WorldCom were first discovered in May 2002 by the company’s internal auditor, Cynthia Cooper (Lyke and Jickling, 3). Cooper discussed the matter with chief financial officer Scott D. Sullivan and controller David F. Myers, who did not cooperate with Cooper’s investigation (Moberg and Romar). Cooper also reported the misclassification to the head of the audit committee, who then replaced the company’s long time outside auditor, Arthur Andersen, with KPMG for an external investigation (Lyke and Jickling, 3). At the center of the scandal was company’s chief financial officer, Scott Sullivan. Under the instruction of Sullivan, other senior executives, including former accounting director Buford Yates and former accounting managers Betty Vinson and Troy Normand, participated in the manipulation of financial reports (Lyke and Jickling). When his requests for fudging the numbers were met with refutation, Sullivan manipulated the figures himself. Immediately following WorldCom’s public announcement, WorldCom’s board terminated Scott Sullivan, and David Myers also resigned the same day (Lyke and Jickling, 3). The Security Exchange Commission (S.E.C) charged the company with fraud a day after the public disclosure (Lyke and Jickling). Investigation that followed the public announcement found that management began shady accounting maneuvers in 1999 and continued in 2000 (Sandberg and Pulliam). Emails revealed that executive knew of what was going on as early...
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