Accounting Fraud: Manipulation of Asset Classification

Running head: ACCOUNTING FRAUD 1
Accounting Fraud
Name
Institutional Affiliation

ACCOUNTING FRAUD 2
ACCOUNTING FRAUD
The main issues in the article relate to the accounting fraud (amounting to 3.8 billion
dollars) committed by Mr. Sullivan (Simon 2002). Mr. Sullivan accounting fraud focused on
manipulating assets classification which saw him classify leases with local telecommunication
companies as assets. The accounting fraud led to WorldCom inking long-term leases with these
local companies for substantially more domestic phone-line connection that were then required
to gain marketplace edge by being able to quickly respond to novel demand as rivals scrambled
for connections. Sullivan then defined this excel leased network capacity as marketing claiming
that it was like a rental of additional space in stores for handling throngs of buyers thought shall
materialize remained a marketing cost. Thus, he charged such “marketing cost” immediately
against the income to fraudulently reduce current expense of such line connections through the
illegal and unethical reclassification (Simon, 2002).
Sullivan thus illegally deferred and amortized costs linked with obtaining
customer/marketing cost over revenue stream linked with such least connection contacts. This is
wrong because marketing expense can solely be amortized if directly linkable to particular
revenue. Sullivan unethically and illegally treated such illegitimate front-loaded expenses as
legitimate expense linked to long-run contracts which are chargeable over the term of
contract/deal. His spin problem with utilizing such a rationale is that expense amortization
applies to revenues contracted actually rather than not to the projection of marketers of what
clients might purchase (Simon, 2002). There was no revenue utilized to justify the expense
amortization and hence the whole remaining part of reclassified line cost had to be charged off
via the restatement of earnings for previous quarters. Sullivan planned to sweep it all away
through a single charge in June quarter with hope that stockholders/investors would negate it as