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The World Com Accounting Scandal Essay

1556 words - 6 pages

The WorldCom Scandal

Key elements at WorldCom………………………………………………………………………3
Corporate Governance Issues at WorldCom…………………………………………….........4
UK Corporate Governance...................................................................................…...5, 6
Conclusion………………………………………………………………………………………… 6

Key Elements at WorldCom

WorldCom began as a small provider of long distance telephone service. During the 1990s, the firm made a series of acquisitions of other telecommunications firms that boosted its reported revenues from $154 million in 1990 to $39.2 billion in 2001 (Lyke and Jickling, 2002).
The economic problem was that WorldCom had a vast supply in telecommunications capacity that emerged in the 1990s, as the industry rushed to build fibre optic networks and other infrastructure based on overly optimistic projections of Internet growth (Lyke and Jickling, 2002)
By 2001 the telecommunications market was softening; meaning prices were falling due to an excess of supply and a decrease in demand as the dot com boom ended. WorldCom had already signed contracts with third party telecommunication companies promising to complete their calls. These multi billion dollar contracts were actually costing more in expenses than what the company would or was receiving in revenue (Sandberg, Solomon, & Blumenstein, 2002).
In 2002, WorldCom’s bankruptcy was the largest in US history; WorldCom admitted that it had falsely booked $3.85 billion in expenses to make the company appear more profitable. Ebber who was CEO of WorldCom created fictitious some more than questionable accounting practices. Thus began the practice of taking an operating expense and reclassifying the expense as a capital expenditure. This would make the company appear to be in good standing and match the stock prices. Internal and external auditors were not being allowed access to these accounting entries yet they just kept signing off on the audits.
In 1999, revenue growth slowed and the stock price began falling. WorldCom's expenses as a percentage of its total revenue increased because the growth rate of its earnings dropped. In an effort to increase revenue, WorldCom reduced the amount of money it held in reserve to cover liabilities for the companies it had acquired by $2.8 billion and moved this money into the revenue line of its financial statements.
In 2000, WorldCom began classifying operating expenses as long-term capital investments. Hiding these expenses in this way gave them another $3.85 billion. These newly classified assets were expenses that WorldCom paid to lease phone network lines from other companies to access their networks. They also added a journal entry for $500 million in computer expenses, but supporting documents for the expenses were never found.
These changes turned WorldCom's losses into profits to the tune of $1.38 billion in 2001. It also made WorldCom's assets appear more...

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