ACCOUNTING largest long-distance company after AT&T before
ACCOUNTING FRAUD AT WORLDCOM WorldCom was the second largest long-distance company after AT&T before its bankruptcy. The company had a rapid growth by acquisitions of other companies just after it went public in 1989. Starting 2000 the telecommunication industry had a downturn and their stocks were declining.
But WorldCom started doing some accounting frauds to prevent its stocks falling. Also CEO Ebbers made WorldCom to provide him cooperate loans so he could cover his margin calls that the bank were pressuring for.WorldCom did the fraud by capitalizing the costs rather expensing them and also inflating the revenues with improper accounting entries. Unfortunately the company’s cooperate culture wasn’t working in favor to prevent for a fraud and internal and external auditors weren’t working efficiently.
By the time the accounting fraud discovered and WorldCom went bankrupt they had created $3. 8 billion worth fraud and it was estimated that the company’s total assets were inflated for $11 billion.The company’s top executives who were involved in this fraud were convicted to a sentence in prison after a trial. 1- Explain the nature of accounting fraud. It’s a criminal offence. Accounting fraud is falsifying and altering accounting records for financial gain.
Committers of this fraud either overstate the company’s assets or understate its liabilities so the company seems financially stronger. Types of accounting fraud •Recognizing revenue in the wrong period or if it never existed •Round tripping Channel stuffing •Making false statements to regulators •Keeping multiple books •Adjusting sales figures (1) WorldCom committed 11 billion dollar accounting fraud over a 3-year period. Over this period they understate the operating expenses by improper releasing of accruals and by improper capitalizations of operating expenses. The managers who involved in this knew the actions they took were illegal. 2- What are the pressures that lead executives and managers to “cook the books”? Cooking the books” means that to create an appearance of earnings that really doesn’t exist. The executives and managers might feel pressure to do it for obtaining additional financing from a bank, reporting unrealistic profits, inflating the share price, hiding losses, attracting customers by appearing to be more successful, achieving a performance-related bonus and covering up theft.
(2) 3- What is the boundary between earnings smoothing or earnings management and fraudulent reporting?They both aim to change the company’s earnings figures but with earnings management companies do it within the accounting rules while with fraudulent accounting they violate the standards. There is a very thin line between them and it is easy to shift to illegal side. 4- Why were the actions taken by WorldCom managers not detected earlier? What management control process or systems should be in place to deter or detect quickly the types of actions that occurred in WorldCom?The reasons that the fraud wasn’t detected earlier: Problems with the company’s internal auditing and controls, Ebbers and Sullivan dominated the company and put other managers under pressure, communication problem within the company, employees didn’t have access nor courage to inform others about fraudulent activities, employees were afraid of loosing their jobs, independent auditors did not work efficiently even there were enough evidence that the company trying to hide some information from them.
The board of committee was disconnected from the company.Improved communication between managers and employees at all level could help to detect a fraud earlier (better working environment). The board of committees should have a greater control and be aware of what is really going on in the company. Also internal controllers should have regular meetings with the managers and shouldn’t feel intimidated by them. 5- Were the external auditors and board of directors blameworthy in this case? Why or why not? They are blameworthy but I don’t think there is any reason to convict them.When WorldCom executives were trying to hide some information and starting to avoid from the external auditors, the auditors should have understood something was not right and acted upon it. The board of committee should have been more involved with the company’s culture and spent more effort to monitor the operations that were being taken.
They just believed what they heard at the meeting, never questioned it. 6- Betty Vinson: victim or villain? Should criminal fraud charges have been brought against her?How should employees react when ordered by their employer to do something they do not believe in or feel uncomfortable doing? In my opinion Betty Vinson was villain. She knew what they were doing wrong and it was violating the accounting standards.
Criminal charges should have been brought against her. She could have informed the authorities and I don’t think her position in the company would be threatened then. Employees should react when ordered by their employers to do something they feel uncomfortable.Even being aware of the fraud and not involving in the scheme may be enough for a conviction. References http://www.
criminalattorneywestpalmbeach. com/articles/accounting-fraud/ (1) http://www. crimestoppers-uk. org/fraud/types-of-fraud/account-bank-card-fraud/false-accounting-fraud ! 2) Issues What conditions let to bankruptcy? How did WC provide fraudulent # for 3-4 years? How did WC’s control mechanism aid fraud? Did the right people pay the price for the fraud? How did poor top management lead to failure?