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Accounting Fraud at Worldcom

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Case Assignment #1 – Accounting Fraud at WorldCom

1. Discuss the fraud at WorldCom in terms of the objective of financial reporting. How was the objective subverted by the actions taken by the managers of WorldCom?

A. To begin, the primary objective of financial reporting for most companies is to provide useful information to capital providers. Essentially, the objective is “to assist in the efficient functioning of economies and the efficient allocation of resources in capital markets” (pg. 21, textbook). However, in the fraud case at WorldCom, WorldCom’s senior managers did not endorse this objective nor made any attempt to provide useful financial information to present and potential equity investors, lenders, and other creditors. Why? The senior managers subverted these objectives by focusing on revenue growth, seen as the key to increasing the company’s market value. Now although this focus is encouraged, WorldCom, as one manager says, “encouraged managers to spend whatever was necessary to bring revenue to the door, even if it meant that the long term costs of a project outweighed short term gains” (Accounting Fraud at WorldCom article, pg. 4). Therefore, CFO Sullivan and others subverted the objectives of providing useful information to external users by using accounting entries to achieve targeted performance.

2. The fraud at WorldCom revolved around two accounting irregularities: accrual releases and expense capitalization.

a. Explain how these two accounting treatments increased WorldCom’s net income. b. What effect did these accounting treatments have on the company’s balance sheet?

A. In regards to accrual releases, GAAP required expected payments to be estimated and matched with revenues in the income statement. This was accomplished however by improperly releasing accruals to pay expected bills. These accruals were

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