Financial Accounting for WorldCom Group- myassignmenthelp.com

Question: Discuss about theFinancial Accounting for WorldCom Group. Answer: On the date of July 21, 2002, the WorldCom Group which is essentially a telecommunications company with a revenue amount of more than $30 billion did file for protection for bankruptcy under Chapter 11 of the U.S. Bankruptcy code. The issue that occurred in the company was that from the year of 1998 to 2000, WorldCom did deliberately decrease the amount of reserve accounts in order to cover up for the liabilities of the companies that it had acquired. WorldCom did make an addition of $2.8 billion from the part of the revenue to these reserves. The reserves were not able to cover it as a result a particular mail was sent on December, 2000 to the respective Texas division reporting this issue. In order to manage this, the CFO, Sullivan instructed the employees or the key members of the organization to tune up the operating costs as long-term investments by an amount of $3.85 billion. This resulted in the scandal that turned the huge losses into enormous profits. To be more clear the ne t income of the company increased by $1.38 billion in the financial year of 2001. The assets were also overstated (Yallapragada, Roe and Toma 2012). The disparities that were observed in the financial statements of the company was that the capital expenditure in the domain of computer expenses was not recorded by the amount of $500 million. The entry of $2 billion was also questionable. Even the profits were increased by the amount of $3.8 billion. The issue or the misstatements that were carried out in the year of 2001 and in 2002 were that the line costs especially the costs related to the utilization of third-party network facilities and services were misstated in the financial statement as capital expenditures. This unethical practice was at first noticed and reported by Cynthia Cooper who was the vice president of the internal auditing team and then reported to the Securities and Exchange Commission. The company accepted its fault and surrendered that these transactions were not in accordance to the generally accepted accounting principles and this resulted in the termination of the CFO, Sullivan. The suit filed by SEC was published on the following day. The turning of line costs into capital expenditures resulted in the fake increase of the net income and earnings before interest, tax, depreciation and amortization (EBITDA). The statement submitted by the company to the SEC also projected the fact that some reserve accoun ts were materially reversed thus further increasing the revenue unethically (Lennox, Lisowsky and Pittman 2013). The situation that was most critical in the case was that capital expenditure in the domain of computer expenses was not recorded by the amount of $500 million. The entry of $2 billion was also questionable. Even the profits were increased by the amount of $3.8 billion. Such fraudulent tasks led to the downfall of the company (Sharma and Panigrahi, 2013). From the cash point of view the fraud hugely did affect the cash flow statements of the company that is the operating expenses were purposely shown as investing expenses. The entire fraud committed not only brought upon the downfall of the company but also resulted in the lowering of the share price of WorldCom to a figure as low as $0.6 due to the negative vibe about the company which had already captured the market. In addition to this almost 17000 employees lost their jobs. WorldComs external auditor Arthur Andersen developed his own auditing approach rather than the traditional approach towards the financial statements. He overlooked many journal entries with absurd amounts without any proper background data or documentation. Even the audit committee was not competent enough to notice the improper entries or identify the material misstatements done or the fraud committed. The relationship or the communication between the management of the firm and the audit committee was also poor. This resulted in delay of the SCF in showing red flag to the company. SCF came to know about the fraudulent activities after the internal auditor of the firm Cynthia Cooper did uncover the fraud worth $3.8 billion (Pedneault et al., 2012). References Lennox, C., Lisowsky, P. and Pittman, J., 2013. Tax aggressiveness and accounting fraud. Journal of Accounting Research, 51(4), pp.739-778. Pedneault, S., Silverstone, H., Rudewicz, F. and Sheetz, M., 2012. Forensic accounting and fraud investigation for non-experts. John Wiley Sons. Sharma, A. and Panigrahi, P.K., 2013. A review of financial accounting fraud detection based on data mining techniques. arXiv preprint arXiv:1309.3944. Yallapragada, R.R., Roe, C.W. and Toma, A.G., 2012. Accounting fraud, and white-collar crimes in the United States. Journal of Business Case Studies (Online), 8(2), p.187.