Case #1 Accounting Fraud at WorldCom

1. The objective of financial reporting is to provide useful information to capital providers, which are also known as the shareholders and investors. At WorldCom, the managers not only failed to provide useful information to the investors, but the fraud they created in their financial statements lead to misjudgment for a lot of the capital providers. The actions of accrual releases that the managers performed completely ignored the objective of financial reporting that describes the uncertainty of prospective cash flows. As for the expense capitalization, Sullivan ignored another objective of financial reporting to clearly portray the economic resources of an enterprise. They recognized the unused line costs as assets, instead of liabilities.

2A. WorldCom transferred funds from the accrued expenses back to current assets by claiming that they were overstated. It disregarded the basic concept of conservative accounting. Expenses are supposed to be recognized when accrued, not when actually paid. Releasing accrued expenses takes away money that was set aside to pay for line costs, putting the money back into assets and overstating the amount of current assets on hand.
Expense Capitalization categorizes operations expenses as capital investments, which are expenses over a longer period of time. Expense capitalization is usually reserved for investment projects that provide value over time and expenses are written off over time. Instead, WorldCom categorized operations expense over time, which would lower expenses in the short run and inflate net income.
B. Released accrued expenses allowed the company to understate liabilities, and overstate current assets. Expenses that are incurred that have not been paid, essentially were not recognized.
Expense Capitalization allowed WorldCom to understate their expenses, because