Accounting Scandal of Worldcom

In: Business and Management

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MANAGERIAL ACCOUNTING

WORLDCOM
How did it cook the books?
Nguyen Bao Khanh
Student ID: FB60162 Class: FB0662

May 19th, 2012

APENDIX
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 the largest filing at its time. Its CEO, Bernard Ebbers, was found totally guilty and sentenced to 25-year imprisonment regarding the crime of stock and accounting fraud. Before WorldCom, the world had seen several cases of famous, or infamous, financial and accounting frauds, including Enron, Tyco, Aldelphia, Global Crossing and HealthSouth. Such cases, we can say, were quite complicated to trace, but WorldCom used a simple recipe to cook the book, which will be illustrated below.

HOW DID WORLDCOM COOK ITS BOOKS?
To understand the fraud occurring at WorldCom, we should basically understand the difference between operating and capital expenditures first, and then we would move on to the details on how the books were adjusted to cause problems.
To begin with, what are operating and capital expenditures? Examples would be provided to clarify these notions in the simplest way. If company X spends $1000 on annual maintenance of the central server computer, the expenditure will be recorded as an operating income and posted to the Repairs & Maintenance Expense account, which consequently decrease current net income. However, if this company pays $5000 to replace and upgrade the…...

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