This website uses cookies to ensure you have the best experience. Learn more

Worldcom Case Response Essay

1287 words - 6 pages

Michael Dobe Jr. Bernie Ebbers(left)
5340–Ethics CEO
Timothy McCoy
4/6/2015 Scott Sullivan(right)

1. Two General Accounting employees-Dan Renfroe and Angela Walter-made journal entries
in the amount of $150 million and $771 million, respectively, without detailed 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 ...view middle of the document...

Support your position using
the authoritative accounting literature.
There were times when Worldcom HAD excess accruals and chose not to release them. This was to sustain the financial Line E/R ratio. This is definitely not an appropriate practice because expenses need to be recognized in accordance with the matching principle. It is not acceptable to hold expenses for a later date when you have excess revenue and can afford to recognize held back expenses.
3. On the topic of capitalizing line costs, critique the rationale included in CEO Scott Sullivan's
White Paper. Based on your own analysis of GAAP, explain the propriety or impropriety of
capitalizing line costs in the telecom industry.
Sullivan explained his rationale in a report to the Board of Directors referred as the “white papers.” In order to meet the customer demand for Internet and data expected to increase at the 8 times annual growth factor, Worldcom had to significantly increase its capital investments. Lease commitments were established to expedite the customer provisioning and revenue stream in accordance with SAB 101, and supplemented by FASB 91, “direct and
indirect costs associated with obtaining a customer may be deferred and amortized over the revenue stream associated with that contract.” So instead of recognizing these expenses immediately, the portion of the unused capacity was able to be expensed later when the revenue was realized. This might have been an O.K. practice in accordance of GAAP if the capitalization of these line costs was done correctly. However, the amounts to capitalize were decided by Sullivan. The capitalization entries were made in “round-dollar amounts, after the close of the quarter and only a few days before the company announced its earnings.” (SEC archives) In effect, expenses that were supposed to be recognized immediately were put on the balance sheet and postponed—not an acceptable accounting practice.

4. Consider the journal entry that recognizes $35 million of revenue in 2001 from the EDS contract based on WorldCom's expectation that the five-year required cumulative minimum payment would not be met. Based on your own analysis of GAAP, explain the propriety or impropriety of this journal entry.
It is as Scott Sullivan said himself in an email, “I do not think it is legitimate. Unlike the take or pay commitment, I believe this looks like a contingent asset and cannot be recorded until the final legal settlement.” And again due to pressures to close the gap, these EDS Ratable Accruals were recorded as revenues in the third quarter of 2001. According to GAAP, revenues are recognized when realized or realizable and earned. Here these revenues are not yet realizable. Collectability needs to be established with reasonable assurance.

5. Why do you think the professionals in this case, most of whom were CPAs, would agree to
record a material journal entry contrary to their best professional judgment?

Other Essays Like Worldcom Case Response

Ethics Research Essay

830 words - 4 pages regulations. The SOX Act was implemented to protect the investors and shareholders of a company. It was enacted in response to the accounting scandals of companies like WorldCom, TYCO, Enron, Waste Management, etc. How has the unethical behavior affected the organization, the individual, and society? In the past, these unethical behaviors resulted in the dissolution of companies, prison sentences and fines, and many public investors and shareholders

Sarbanes Oxley Essay

1024 words - 5 pages mandates of SOX. Examine why the new enhanced standards are necessary The bill was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of affected companies collapsed, shook public confidence in the nation's securities markets. In the case with

International Business

2883 words - 12 pages Sample Case 1 Ethics and Social Responsibility Case A New Concern for Human Resource Managers: Whistle-Blowing Each year Time dedicates a front cover of its magazine to a “Person of the Year.” Last year, for example, New York City Mayor Rudolph Giuilani was given such an honor for his handling of New York’s 9/11 terrorist crisis. This year Time expanded its version of the person of the year. It dedicated its cover to “Persons of the Year.” The

Review Of Accounting Ethics

1382 words - 6 pages Review of Accounting Ethics - Week 3 Alessio Brasile Strayer University Financial Accounting ACC-557 Dr. A. Golding April 28, 2013 Review of Accounting Ethics - Week 3 Given the corporate ethical breaches in recent times, assess whether or not you believe that the current business and regulatory environment is more conducive to ethical behavior: In the past several years, Enron, WorldCom, Tyco, and others have committed financial

Synthesis Accounting Scandals

1796 words - 8 pages  Bank of England as a regulatory body. After a nine-year struggle, due to the Bank's statutory immunity, the case went to trial in January 2004. However, in November 2005, Deloitte persuaded creditor Abu Dhabi to drop its claims against the Bank of England, except for a claim for return of its deposits, in that Abu Dhabi owned 77% of the bank shares at closing, and was therefore also facing a major lawsuit. To date liquidators have recovered about

Enron, WorldCom, HIH, Qantas NZ, Etc-Corporate Governance Failure!

3289 words - 14 pages IntroductionOne of the very first concerns of the recent international publicity has been stressed in the context of corporate governance failure since collapses and scandals occurred at some famed multinational firms like Enron, WorldCom, HiH, Tyco, Adelphia etc. over the past 2 years. These corporate events that took place in the range of worldwide has made globe stock markets suffered and seriously impacted the world's financial foundations

Corporate Attorney Client Privilege and Work Product Doctrine

2128 words - 9 pages in the observance of law and administration of justice.”(a) However, since the passage of the Patriot Act (b) (terrorism, September 11, 2001), and the various corporate scandals leading to the Sarbanes Oxley Act(c) and the Securities and Exchange Commission (2001 Seaboard Report) and the fall out from such companies as Enron, WorldCom the federal, state and regulatory offices of the government are attempting to pierce the Attorney Client

Quality Manager

2536 words - 11 pages Trading has been all over the news over the last several years. First it was Enron and WorldCom. Then even the apparently squeaky clean Martha Stewart got pulled in with the ImClone insider trading scandal. So just what is Insider Trading? Despite all of the new coverage, you may still be unsure of what insider trading is and how it is punishable. Definition of Insider Trading Insider trading occurs if you know material confidential

Business Methods

2579 words - 11 pages securities in the portfolio, divided by the number of the fund’s outstanding shares. This price fluctuates based on the value of the securities held by the portfolio at the end of each business day. Mutual fund investors do not actually own the securities in which the fund invests; they only own shares in the fund itself. In the case of actively managed mutual funds, the decisions to buy and sell securities are made by one or more portfolio

Enron Research Case

1987 words - 8 pages the failure of Enron. The Audit Committee of the Board should have been more critical of the auditors and their work. Sarbanes-Oxley Act (SOX) The Sarbanes-Oxley Act of 2002 is legislation enacted in response to the high-profile Enron and WorldCom financial scandals to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise. The act is administered by the Securities and Exchange

Suncor and the Adoption of Ifrs

4049 words - 17 pages therefore, easier access to foreign capital markets. Introduction The collapse of Enron, WorldCom and others brought a negative spotlight to the requirements of the rules-based United-States GAAP. The Financial Accounting Standards Board (FASB) has reacted by ordering the conversion of rules-based regulation to a principles-based system. Enormous pressure was then placed on the United-States and on the rest of the world to recognize the role of

Related Papers

World Com Essay

1481 words - 6 pages ) In the case of WorldCom, the primary claim that was made was that senior officials did not know that false accounting practices were happening, and that the officials also did not know that money was being taken out in loans against the company in order to falsify statements. The SEC found that WorldCom was negligent in this case and that they were guilty due to the fact that a subsection of this law requires companies to submit factual and

Worldcom Case Analysis

994 words - 4 pages might not have felt that much pressure and risk. Cynthia made backup copies of their files in response to fears that if their investigation was revealed, files might be destroyed. Gathering more evidence helped her make accurate judgement. Even though whistleblowing is considering a valuable attribute towards the company’s ethical culture, it may cause some serious negative effects. In the WorldCom case, whistleblowing resulted in bankruptcy of

Ethical Issues Essay

5638 words - 23 pages plan hatched by the SEC for a public accountability board, have revived hopes for reform. Indeed, the Sarbanes bill should be treated as only a start. It sharply restricts the consulting work that accounting firms are allowed to do for audit clients; WorldCom and Enron, paid Andersen more for consulting than for audit. It would be better to ban all non-audit work. Last came accounting standards themselves. The WorldCom case is simpler than

Managerial Accounting And The Code Of Ethics

3338 words - 14 pages and Enron, all publicly traded companies now have to be audited by an external accounting firm. Ethics are critical here as well, as managerial accountants have to produce the financial statements for external auditors to review. This has created a separation of duties, whereas before the collapse of WorldCom and Enron, the external accountants would produce the financial reports and audit them as well. In the case of WorldCom and Enron, internal