Worldcom Case Study

In: Business and Management

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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 to follow matching concept between revenue and expense for any accounting period. In year 1999 to 2000, the senior manager managed the earning by manipulating accounting entry of expense accrual i.e. they reverse the accrual to reduce the expense line in the income statement. Hence the accrual left in books was much lesser than as compare to the actual payment required to make in future (Hans-Ulrich Westhausen, 2010).
In 2001 when only few accrual left to release, senior managers start disguising operating expenses as capital expenditure to avoid revealing of the losses of the company. As per GAAP, operating expense should booked entirely in the year to which it relate to while capital expenditure get capitalized and booked in expense head over the period in the form of depreciation. CFO, Scott Sullivan ordered the seniors to reclassify the operating expense to capitalize head so that they can be book in expense head over the period of time.
Pressures led senior managers to manage WorldCom’s earnings:
Senior manager cooked up the earning of the company because they were under the pressure to maintain the company expense revenue ratio within 40-42% range (Fong, 2006). As per the CEO Bernanrd Ebbers, the main aim of the company was to become number 1 stock in Wall Street. To meet the company expectation, senior manager was under pressure to manage the earnings at any…...

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