In 2002, WorldCom a telecommunication company, filed for bankruptcy. It was later revealed that the company was involved with improper accounting in two major forms. First WorldCom inflated revenues to increase profits, thereby increasing stock prices, and increasing the satisfaction of stakeholders. Second, the company understated line costs. Revenue is important to users of financial statements because it helps them evaluate a company’s performance and prospects.
WorldCom violated the revenue recognition principle by creating an account that did not come from the operating activities of the company’s sales channel. WorldCom named this fictitious schedule corporate unallocated account. This action was unethical and illegal, and gave the company a very bad reputation.
According to paragraph 25 of PCAOB Auditing Standard No. 5, because of its importance to effective internal