How did it cook the books?
Nguyen Bao Khanh
Student ID: FB60162 Class: FB0662
May 19th, 2012
1. WorldCom’s accounting scandal 2. How did WORLDCOM cook its books? 3. Conclusion
WORLDCOM headquarter in Virginia, USA.
WORLDCOM’S ACCOUNTING SCANDAL
WorldCom, established in 1983, whose CEO was Bernard Ebbers, was the second largest long distance phone company in the US after AT&T. It could be seen as a pride of America until it got into one of the biggest accounting scandals in the American history which finally led to its bankruptcy in 2002. On July 21st, 2012, WorldCom filed for bankruptcy, which was worth 103.9 billion USD and became ...view middle of the document...
There would be no effect on current net income as increasing in Equipment means increasing in depreciation expense. Instead of being spent in the current year only, the cost is spread over many years. At the moment, you may have the general image of the tactics that WorldCom used to cook their books.
WorldCom announced $3.8 billion in improperly booked expenses for 2001 and 2002, and an additional $3.3 billion in accounting errors. Moreover, WorldCom officially filed for bankruptcy when found an accounting fraud with the amount up to $11 billion. So how did it happen? As having mentioned, WorldCom’s CEO Bernard Ebbers was convicted of being guilty for the stock and accounting fraud, so it was obvious that the fraud occur from the management level of the company. WorldCom’s major operating expense was called line costs, which means cost paid to lease other telephone operators’ network, phone lines and so on. In short, just remember that line costs are its main operational expense. In 2000, WorldCom was actually not doing a good business, and they somehow tried to cover the current reality by performing some ‘magic’ with their accounting stuff, and here is the thing: WorldCom was managing to cover the truth behind its business, so according to his indictment, Mr. Scott Sullivan – former CFO – tried to move around the reserves for bad debt but that did not make the situation better by 2001. Afterwards, Mr. Myers – former senior vice president and controller – was instructed to take line costs out of operating expense accounts where they belonged and record them into capital accounts by Mr. Sullivan. Betty Vinson and Troy Normand, managers in the accounting department, were asked to take out $828 million of line cost accruals of the income statements in October 2000, and then they were asked to transfer $771 million of line cost to...