D A VI D KIR O N Accounting Fraud at WorldCom WorldCom could not have failed as a result of the actions of a limited number of individuals. Rather, there was a broad breakdown of the system of internal controls, corporate governance and individual responsibility, all of which worked together to create a culture in which few persons took responsibility until it was too late . — Richard Thornburgh, former U.S. attorney general1 On July 21, 2002, WorldCom Group, a telecommunications company with
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Accounting Fraud at WorldCom 1) What are the pressures that lead executives and managers to “cook the books?” After the rapid evolution of the telecommunication industry in the 1990s, WorldCom shifted its strategy to focus on building revenues and acquiring capacity sufficient to handle expected growth. Their biggest goal was to be the No. 1 stock on Wall Street rather than capturing the market share. As a result, their Expense-to-Revenue (E/R) Ratio was their measurement for their main objective
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Case Study The Rise and Fall of Worldcom This case study is about Bernard Ebbers CEO of Worldcom, Inc. and Scott Sullivan CFO of Worldcom, Inc. once they were boosted the company growth and they got awards. Later on they made frauds by using their influential tactics on employees and company’s board. Those are Assertiveness: it involves applying legitimate and coercive power to influence others by threatening or giving punishment. This tactic was used by sullivans office where they berated and
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during the WorldCom saga/ What does your analysis suggest? Dennis Greer’s fraud triangle is a key framework in analysing the ‘factors that cause someone to commit occupational fraud’ (ACFE-The Fraud Triangle, Association of Certified Fraud, Examiners Available from:http://www.acfe.com/fraud-triangle.aspx [January 2014]). The three elements that make up the model are perceived pressure, perceived opportunity and rationalisation. In reference to the events of WorldCom, which has
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WorldCom Case Study The problems with WorldCom are the lack of internal control, disordered corporate culture, management failure and the fraud accounting practices. In this case, the EBITDA has been largely exaggerated. A $3.8 billion EBITDA overstatement became WorldCom’s accounting shame. For companies, EBITDA is a way to measure the results of operations excluding the effect of interest, corporate income taxes, depreciation and amortization of long-term assets. It provides a way to compare
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Answer no 1 (a): How senior managers at WorldCom managed earnings: Senior manager of WorldCom (CFO, Scott Sullivan) has cooked up the earnings of the company by violating the two basic rule of accounting i.e. accrual and capitalization. They overstate the company pre-tax income by releasing the accrual balance to the income statement and by capitalizing the operating expenses in the books (Dick Thornburgh, 2004). As per the GAAP (generally accepted accounting principles), a company should required
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support. It was noted that this was not out of the ordinary at WorldCom. In your opinion, was this a proper accounting practice? Explain. Normally at the end of each month, Worldcom would estimate the costs of using “Off-net” facilities and connections. Worldcom would accrue these liability estimates. Line cost accrual estimates were very difficult to estimate with precision, especially for international services. When Worldcom learned more about the applicable charges of these Off-net services-when
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revenues with bogus accounting entries from "corporate unallocated revenue accounts".` * In 2002, a small team of internal auditors at WorldCom worked together, often at night and in secret, to investigate and found out $3.8 billion in fraud. Shortly thereafter, the company's audit committee and board of directors were notified of the fraud. * As the result, WorldCom has accumulated around $41 billion in debt. By the time it declared bankruptcy in 2002, the organization had combined loss of $73.7
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WorldCom Case Study Requirements 1. The paper must be a minimum of 5 pages in length with 1.5 inch spacing. There is no required font type but it must be legible. Font size cannot be less than 10 nor exceed 14. Use full sentences and avoid using bullet points within the paper. 2. Explain and answer the following questions: a. What are the pressures/forces that lead executives and managers to “cook the books?” b. What is the boundary between earnings smoothing or earnings management
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to me is where fraud is committed. Otherwise make your best judgement call on what would be appropriate to capitalize, or develop a new way of calculating estimates for accruals if you believe them to be wrong. 3. Why were the actions taken by WorldCom managers not detected earlier? There was no set of stated policies written in the company. The company most likely had around 30,000 employees in 1995, but didn’t have an employee code of conduct. Since this was not in place, every manager was able
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