1- What are the pressures that lead executives and managers to “cook the books?”
In the 1990s, the telecommunication was rapidly growing which led WorldCom to adopt the strategy of purchasing small long distance firms with limited geographic service areas and consolidating carriers with large market shares. This was the company’s main key profit. Indeed, by adopting this strategy, WorldCom grew quickly by expanding internationally in South America, West America, Europe and Latin America. As a result of this, WorldCom became the leader in this industry.
- The pressure that Ebbers put on his employees as he wanted by the number one stock in Wall Street by increasing the revenue. He demanded ...view middle of the document...
2- What is the boundary between earnings smoothing or earnings management and fraudulent reporting?
Smoothing earnings is not preferred but in the same time is not an illegal act. It basically make the earnings seems more smooth by reducing the fluctuations. By smoothing the earnings, the net income fluctuations from one period to the next will be less. Indeed, companies practise this due to the fact that investors prefer to pay premium for stocks that are stable in their earnings.
However, fraudulent reporting is an illegal act as managers tend to practise it with the intention to hide and misreport the company’s financial figures and information. It actually misreports amounts and discloses false financial information and figures.
Regarding the case, WorldCom did commit fraud as it has practised fraudulent reporting. In fact,
- It has released accruals of $3.3 billion, which is way below the accruals for the future cash payments.
- It stopped recognising expense for unused network capacity and capitalized $771 million of non-revenue generating line expense into an asset account. Then, WorldCom reverse $227 million of capitalized amount to make accrual release from liability.
- Also, Sullivan intentionally didn't provide all the necessary information to the internal audit department by sending them only hat information which puts the company in a better position by having less expenditure, bad debt and future cash payments.
- Besides, WorldCom warned the employees not to reveal all the information for the external auditors (Anderson).
- WorldCom intentionally altered accounts and transferred millions in accounts balance in order to deceive Anderson.
3- Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the type of actions that occurred in WorldCom?
- Sullivan hided the original accounting entries so that no one can have an access to them. Also, the accountant who did those entries were afraid to loss everything if they spoke. Thus, it made it very difficult for anyone to find out.
- The internal and external auditors were far away from the true information as the information provided was the misrepresented one.
- The role of board of directors was weak as they were not involved with anything. They actually barely interact with each other. They have actually left Sullivan to manage the company the way he wants.
Indeed, several actions should be been taken in order to prevent such chaos in the company:
- The board of directors should have exercised their powers and should have been more involved about the company’s decisions.
- A more powerful and restricted legal system should have been adopted.
- A more effective system for measuring unethical behaviours in the company.
- A more favourable reporting system to encourage the employees to report any unethical and illegal behaviour in the company, which will affect the...