Analysis of Accounting Fraud in WorldCom Case Study Report

This report provides an in-depth analysis of the accounting fraud committed by Scott Sullivan at WorldCom, which involved manipulating asset classification to reduce expenses and inflate earnings. Sullivan reclassified telecommunication leases as assets, falsely amortizing costs over time. This unethical practice violated FASB standards and led to significant financial statement misrepresentation. The report details how Sullivan's actions, including the illegal deferral of marketing costs, were eventually uncovered by internal auditors. It explores the implications of these fraudulent activities, emphasizing the importance of ethical accounting practices and accurate financial reporting. The analysis also references related articles and accounting principles, providing a comprehensive understanding of the case.

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

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merely another telecom-bubble water wave under the bridge. Fortunately, the internal auditors of
WorldCom thwarted the fraud and blew the whistle.
Sullivan manipulated the FASB’s provision on asset classification thereby unethically
and illegally classifying telecommunication line connections’ cost as asset yet he knew they did
not meet the criterion of FASB’s probable future economic benefits obtained/controlled by
specific entity as a consequent of previous event or transactions (Simon, 2002). Whereas
Sullivan’s definition stayed in line with FASB’s definition of asset, it never implies that it
completely adheres to the criteria for what might get amortized. This is because Sullivan ought to
have cited the related FASB’s provision that ‘economic benefit’ measurement has to remain
verifiable and free from bias which was hardly Sullivan’s basis for amount of extra connection
capacity leased (Baker, 2017). Moreover, Sullivan new very well that merely leasing an item
never makes it an asset since there is a criteria for which a lease qualifies as an asset as
“financing” or “capital” lease. This because WorldCom’s local telecommunication lines lease
was never a capital lease as the Company never assumed responsibilities alongside risks which
mart the ownership of asset like maintenance, obsolescence and depreciation.

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References
Baker, C. R. The influence of accounting theory on the FASB conceptual framework. Accounting
Historians Journal. 2017.
Simon, D. WorldCom's Yogi Berra Of Accounting. Forbes. 2002.
https://www.forbes.com/2002/07/10/0710simons.html#1c714ae04566