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Article review: Accounting Fraud at worldcom - Essay Example

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Article review: Accounting Fraud at worldcom

As the E/R ratio imbalance kept increasing, the managers sought to cook the books so as to prevent investors and government from getting the consistent results. 1. Case Summary WorldCom, the Nation’s second largest long distance Telecommunications Company filed for bankruptcy protection on July 21st 2002 revealing that it had overstated earnings in 2001 and the first quarter of 2002 by more than $3.8 billion. Further on August 8th of the same year the company again admitted that it had maneuvered its reserve accounts also affecting another 3.8billion. Substantial accounting fraud was charged against the firm by the US Securities and Exchange Commission. The actual cause of the corporate failure lies with the enormous oversupply that could be attributed to excessively optimistic projections of Internet growth. Evidently, the company’s projections on expense-revenue ratio flawed as “the industry conditions began to deteriorate in 2000 due to heightened competition, overcapacity, and the reduced demand for telecommunications services at the onset of the economic recession” (Kaplan & Kiron, 2007). Subsequently, the stock market value of the firms in the telecommunication industry plunged and people at the WorldCom’s helm of affairs intervened in the accounting practices to conceal the actual trouble from public. In short, what they did was that they transferred a considerable part of current expense to a capital account as the capitalized cost would normally be considered as investment. 2. What were the pressures that led executives and managers to “cook the books?” Evidently the company struggled to maintain its E/R ratio since the first quarter of 2000 ‘while facing revenue and pricing pressures and its high committed line costs’ (Kaplan & Kiron, 2007). WorldCom had to spend beyond its capacity due to unnecessary acquisitions of other firms. In order to overweigh the short term loss, managers were asked to spend exceedingly so as to raise immediate revenue. There was incessant pressure from the top. For instance, CFO Sullivan directly insisted Myers and Yates to carry out his plans. And on the bottom line, individuals like Betty were forced to partake in accrual releases and capitalization of line costs. These were the situations in brief that made executives and managers to “cook the books. 3. Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom? The company officials could qualify a considerable amount of costs as investment in 2001 and the first quarter of 2002, and this could have allowed the company to spread the costs to subsequent years if Cooper had not come across the issue. Obviously, the incident indicates the prevailing pitfall in the US corporate governance. Evidently, audit firms have to make strategic amendments to their processes and procedures to detect frauds and errors in the account books of the client on time. WorldCom was indirectly supported by the Andersen accounting firm, who ignored the fact that the organization’s practices were apparently unethical. Only government can safeguard the interests of its citizens against unscrupulous business practices. Likewise, various service institutions particularly that of banking and accounting must keep themselves reliable and sustainable to prevent this kind of fraud in future. 4. Were the external auditors and board of directors ...Show more


WorldCom: Case Study WorldCom: Case Study Introduction The fall of the corporate giant WorldCom was inevitable in every sense because it neither followed reasonable market oriented objectives nor complied with legal and ethical norms…
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Article review: Accounting Fraud at worldcom essay example
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