Accounting Scandal of Worldcom

940 words 4 pages
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
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Sullivan. Betty Vinson and Troy Normand, managers in the accounting department, were asked to take out $828 million of line cost accruals of the income statements in October 2000, and then they were asked to transfer $771 million of line cost to capital expenditure since they were assured that they were not doing anything illegal by Mr. Sullivan. To be honest, the error of recording operating expense to capital expense is one of the most visible ones in accounting and might be regarded as a stupid error. However, such a big external auditing firm as Arthur Anderson could not uncover this fundamental fraud. For that reason, it took three auditors from the internal audit department headed by Cynthia Cooper to uncover the fraud, which included the concerns about the $2.3 billion capital expense and treatment of $400 million of bad debt reserve. The auditing and investigation continued until WorldCom ended up the game by announcing that it has inflated profits by $3.8 million over the past five quarters, and thus bankruptcy was unavoidable. With its total asset of $107 billion, this became the largest bankruptcy in the US history at that time, even larger than Enron’s.

CONCLUSION
Different from other cases like Enron, Aldelphia, Global Crossing or HealthSouth, top management level of WorldCom used an extremely

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