First of all, line costs are the amounts that WorldCom paid other companies to be able to use their communication networks for their customers and it included access fees and transport charges for messages. The line costs are an expense and instead of reporting them as an expense at the time, they chose to hold off on paying them and adding them in as an expense so that it would look as though WorldCom was earning more than they really were.
The first solution should have been to relook at the financial statements of WorldCom from an ethical standpoint. Instead of ignoring expenses or changing expenses into assets and assets into expenses, WorldCom should have followed the guidelines of the Generally Accepted Accounting Practices and the SEC and followed the accrual method for their financial statements. If Scott Sullivan would have followed the rules of the GAAP and the SEC, WorldCom could possibly have gotten themselves out their financial hole rather than making it larger.
Since that did not happen the internal auditors are considered to be the first line of defense against accounting errors and fraud within a company. The treatment of those line costs was found by Cynthia Cooper who was WorldCom’s internal auditor. It was brought to the attention of Scott Sullivan (WorldCom’s CFO) and they wanted him to explain why they had treated their line costs as capital expenditures. Now, the purpose of the United States securities law is to help protect all investors in a company from any corrupt practices. It provides investors with full disclosure of information that is concerned with public offerings of securities. It took more than a year for WorldCom’s internal auditors to find the misclassifications of the line costs and the impact that it made on the company’s net income and assets. Because of that, I think that WorldCom should have had a company-wide code of