ACCT3102: Comprehensive Case Study on Accounting Fraud at WorldCom

This case study provides an in-depth analysis of the accounting fraud at WorldCom, focusing on how senior managers manipulated earnings through capitalisation and accruals to meet financial targets. It discusses the pressures that led to fraudulent reporting, distinguishing it from earnings management. The study also examines why the fraud went undetected for several years, highlighting failures in corporate culture, auditing, and internal controls. Furthermore, it suggests improvements in governance, such as whistleblowing policies and auditor independence, to prevent similar incidents. The case underscores the importance of ethical conduct and robust governance structures in maintaining financial integrity. Desklib is a platform where students can find similar solved assignments and past papers.

Running head: ACCOUNTING FRAUD AT WORLDCOM
Accounting Fraud at WorldCom
Name of the Student:
Name of the University:
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1ACCOUNTING FRAUD AT WORLDCOM
Table of Contents
Answer to Question 1:.....................................................................................................................2
Part (a):........................................................................................................................................2
Part (b):........................................................................................................................................2
Answer to Question 2:.....................................................................................................................3
References:......................................................................................................................................5

2ACCOUNTING FRAUD AT WORLDCOM
Answer to Question 1:
Part (a):
Ways through which senior managers at WorldCom managed earnings:
Scott Sullivan, the Chief Financial Officer of WorldCom, has distorted the earnings of
the organisation by breaching two primary accounting rules, which include capitalisation and
accruals. Moreover, the senior managers had overstated the pre-tax earnings of the organisation
by disclosing the accrual balance to the profit and loss statement and by capitalising the
operational expenses in the books of accounts (Agrawal and Cooper 2015). According to
“Generally Accepted Accounting Principles (GAAP)”, it is necessary for an organisation to
adhere to the matching concept between expense and revenue for any accounting year. Between
1999 and 2000, the CFO managed the earnings by manipulating the expense accrual accounting
entry, which implies that the accruals are reversed for minimising the expense line in the profit
and loss statement. Therefore, the accruals remaining in the books of accounts were much lower
compared to the actual payment need for future (Agrawal and Cooper 2017).
During 2001, when only some remaining accruals were left to be disclosed, the senior
managers initiated disguising operational costs in the form of capital expenditure for avoiding
disclosure of the business losses. According to GAAP, it is necessary to book operating cost
totally in the period to which it relates and capital expenditure is to be capitalised and booked in
expense section over the period as depreciation. However, Scott Sullivan had ordered the other
senior managers working under him to re-categorise the operating cost to capitalisation head for
booking the expense head over the timeframe.
Pressures that led senior managers to manage WorldCom’s earnings:
The senior managers distorted the earnings of WorldCom, as they were pressurised to
maintain the expense-revenue ratio between 40% and 42% range (Ailon 2015). According to the
Chief Executive Officer, Bernard Ebbers, the primary goal of the organisation was to be the
leading stock in Wall Street. For fulfilling the expectation of the organisation, the senior
managers were always under pressure in managing earnings at all cost. In addition, the economic
recession, collapse of dot-com and immense competitive rivalry led the senior managers of
WorldCom in overstating the profit of the organisation. From the managerial and employee
perspective, the employee benefits that they had obtained were due to the extraordinary
performance of the organisation. In order to save their jobs and personal benefits, the managers
and staffs had blindly followed the decisions of their immediate supervisors.
Part (b):
Boundary between earnings management and fraudulent reporting:
Earnings management could be defined as the accounting technique in the best possible
way at the time of formulating the financial statements of the organisation for depicting the
positive picture of the business performance. The earnings management takes into consideration
legitimate and less than legitimate attempts for smoothing earnings over the accounting year
(Giroux 2017). Earnings management are carried out in line with the principles of GAAP.
However, at the time organisations provide information, which is material misleading

3ACCOUNTING FRAUD AT WORLDCOM
deliberately, it is converted into fraud. The earnings management takes into account variation in
accounting methods and policies, deferred expense, one-time cost and accelerating revenue
based on short-term. Fraudulent reporting is considered to be illegal and the Securities Exchange
Board (SEC) might impose fines on the organisations.
Discussion of whether senior managers at WorldCom crossed the line from earnings
management to fraudulent reporting:
It is clearly apparent from the WorldCom case that the senior managers were involved in
fraudulent reporting by deliberately conducting manipulated entries in the books of accounts for
increasing the profit level of the organisation. Scott Sullivan and David Myers, the controller of
WorldCom, had compelled their staffs to manipulate the books of accounts by disclosing
capitalising and accrual expenses without any form of basis and support. The only motto of the
organisation was to maintain the leading position in Wall Street (Hail, Tahoun and Wang 2018).
There are some instances from which it could be found that the senior managers had
conducted fraudulent reporting and they are enumerated briefly as follows:
 Disclosure of $3.3 billion accrual between 1999 and 2000 for maintaining the profit level
of the organisation
 At the start of the year 2001, the senior managers of the organisation had initiated
capitalising the unused additional cost of network capacity rather than booking the same
in the form of an expense
 Scott Sullivan had asked Cynthia Cooper, the Director of Internal Audit, to delay the
audit for capital expenditure for gaining time in developing fictitious support (Jackson
2015)
Answer to Question 2:
Reasons for not detecting the actions of WorldCom managers for three to four years:
The primary reason emphasises on unclear and closed corporate culture and the junior
members had to abide by the orders of their seniors. Moreover, none of the staffs of WorldCom
associated with fraud had unveiled the act because they might lose their jobs. For instance, Betty
Wanson, a loyal employee of the organisation, had not complained against fraud by blindly
adhering to the orders of her senior supervisor (Markham 2015).
Secondly, Arthur and Andersen, the external auditor of WorldCom, could not identify
accounting fraud because of a variety of reasons. The reason is that the auditor could not
communicate with some staffs; no access to the computerised financial system and use of
substandard approach rather than substantive procedure at the time of analysing the books of
accounts (Melé, Rosanas and Fontrodona 2017).
Finally, the development of departments such as HR in Florida along with Legal in
Washington had made it complex in establishing synchronisation between departments and
staffs. In addition, the department of internal audit had not performed vigilantly, since majority
of the decisions were undertaken by senior managers by not seeking permission and accordingly,
supportive documents were prepared.

4ACCOUNTING FRAUD AT WORLDCOM
Governance failures in WorldCom and processes or systems needed to detect quickly the types
of actions that occurred in the organisation:
From a prima facie evidence, it has been identified that the Director Management
Reporting, Betty Vinson, was a victim, since she had no other option than following the order of
her supervisor during that time. However, she was associated with fraud, since she was fully
aware of the malpractices and accounting distortions from the beginning. At the time the senior
manager (CFO) of WorldCom asked her to manipulate the books of accounts through profit
inflation or accrual reversal, she knew that it was wrong. This is because they violated GAAP;
however, she still conducted the manipulation. Even though she refused to carry out the same in
the initial stage, she was later convinced to pass the misleading entries in the books of accounts.
Thus, Betty Vinson had full knowledge about such fraud from start to end for saving her job. The
colleague of Vinson, Troy Normard, the “Director Legal Accounting Reporting”, was engaged in
the fraud as well and he left the job immediately. Although Vinson had thought of the same;
however, her family was dependent on her job due to which she changed her mind.
Vinson had disclosed the accrual of $3.3 billion over the years from the books so that the
profit of the organisation could be inflated based on the order of the immediate seniors. This
surely has violated the corporate governance failures due to which criminal charges need to be
brought against her. This is because she prioritised her self-interest by ignoring the needs of the
shareholders, bankers, lenders and customers (Pamungkas, Ghozali and Achmad 2018).
In order to deal with those governance failures, WorldCom could have used proactive,
reactive and automotive systems so that the organisation could be saved from fraud and
malpractices. Firstly, there needs to be openness and clarity in corporate culture. Adequate rights
need to be provided to the staffs to communicate with any individual in hierarchy and they need
to provide correct answers to the questions. In this context, Soltani (2014) cited that the
organisation could have whistle blowing policy in place to assist the staffs in raising their voice
against any malpractice by not scared of job loss. Moreover, it is necessary to ensure fair
dealings with the auditors. The auditors should have been provided with the authority of
collecting any data along with accessing its books of accounts. However, as per Sorensen and
Miller (2017), the auditors are needed to be independent and they should carry out their
obligations with honesty and due diligence for representing the actual financial health of the
organisation.
Finally, WorldCom could have ensured the presence of written policies and documents in
place in relation to policies, authority as well as decision making power. Thus, according to
Wong and Venkatraman (2015), all the employees are required to abide by the norms and
regulations at their workplace. However, the principles and moral values of the employees play a
significant role, as they need to be more determined in raising their voice against the business
malpractices. If the authorised committee does not undertake any action, the employees need to
inform the same to the top management and statutory auditor regarding the unethical practices
adopted by the managers. Thus, they are required to serve as whistle blowers for protecting the
interests of the creditors, bankers, staffs, shareholders, customers and other stakeholders of the
organisation.

5ACCOUNTING FRAUD AT WORLDCOM
References:
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Agrawal, A. and Cooper, T., 2017. Corporate governance consequences of accounting scandals:
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Ailon, G., 2015. From superstars to devils: The ethical discourse on managerial figures involved
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Giroux, G., 2017. Accounting Fraud: Maneuvering and Manipulation, Past and Present.
Business Expert Press.
Hail, L., Tahoun, A. and Wang, C., 2018. Corporate Scandals and Regulation. Journal of
Accounting Research, 56(2), pp.617-671.
Jackson, C.W., 2015. Detecting Accounting Fraud: Analysis and Ethics. Pearson Higher Ed.
Markham, J.W., 2015. A financial history of the United States: From Enron-era scandals to the
subprime crisis (2004-2006); From the subprime crisis to the Great Recession (2006-2009).
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Wong, S. and Venkatraman, S., 2015. Financial accounting fraud detection using business
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