The company I chose to analyze is WorldCom. This company based in Mississippi had recognized that for several years it has been bloating or increasing their earnings through booking about $3.8 billion expenses as long-term investments rather than operating costs. They did that by posting operating expenses such as salaries and wages as long-term investments on the balance sheet while those costs should have been expensed and posted to the income statement. When they did that, they overstated assets while extremely understating expenses. This led to an overstatement of net income; the company then devalued such costs which led cash flows, profit margins and net income to be affectedly inflated. Given the fact that those are the key measures used to value the company’s stock, the company’s stock was highly overpriced.
If I had been an accountant for WorldCom, I would have treated such disbursements as normal operating costs. If I had been forced by management to indulge in such an unethical behavior, I would see myself enforced to have reported the company to the authorities as this is a serious violation of accounting ethics, and I would not want to be part of such violations.
WorldCom’s reaffirmation of earnings had put the company in default of bank agreements. Such default resulted in loans being called in for immediate payment. WorldCom’s financial problems made it impossible for it to make enough profit to cover such loans as they were called in. Dreading bankruptcy and the possibility of interruption of service, WorldCom’s customers started looking for other, more stable telecom providers which led to even less profit coming in each month to pay their obligations.
Please join StudyMode to read the full document