WorldCom Scandal: An Analysis of Accounting Fraud and Ethics

This case study examines the WorldCom accounting fraud, which involved incorrectly recording $3.3 billion in profits and underreporting line costs. The company misclassified routine revenue expenses as capital expenditures to inflate profits and deceive shareholders. Key individuals involved included CEO Bernard Ebbers, Controller David Myers, and external auditors from Arthur Anderson LLP. Signs of fraud were evident in unsatisfactory revenue figures and excessive executive loans. The scandal could have been prevented through stronger ethics codes and corporate governance. Post-fraud, accounting rules have become more stringent, with detailed disclosure requirements and stricter regulations on capital expenditures. Desklib provides access to similar solved assignments and past papers for students.

Running Head: Accounting Scandals
WORLDCOM’S CASE OF
ACCOUNTING FRAUD

Accounting Scandals 1
How did the company do it?
The internal audit of the company discovered the fact that $ 3.3 billion of the company’s
profit were incorrectly recorded in the books since the year 1999 to 1st quarter of year 2000.
The line costs of the company were underreported in the books of accounts. Also, anomalous
accounting entries of around $9 billion were identified in its books. Further, the balances of
the reserves which were created for estimates losses were transferred to revenue line of
financial statements and the operating expenses were reported as capital investments of long
term nature (Yallapragada, Roe & Toma, 2012).
Why did the company do it?
The company did these frauds with the intention of deceiving its shareholders. The reporting
of revenue expenses of routine nature as the capital expenditure was done with the motive of
avoiding the declaration of losses and showing the inflated profits in its financial statements
so as to report its sound financial performance.
Who in the company did it?
 Bernard Ebbers (CEO)
 David Myers –Controller and Senior Vice President
 Buford “Buddy” Yates –Former Director
 Betty Vinson- Former Director
 Troy Normand –Former Accountant
 Arthur Anderson LLP – Kenneth M. Avery and Melvin Dick-Primary Auditors
 John Sidgmore - Vice Chairman until 2002.
 Jack Grubman –Analyst

Accounting Scandals 2
 Cynthia Cooper – Chief Internal Auditor
Were there signs in the financial statements before the fraud was discovered? If so,
what were they?
Yes, there were signs of scandal in the financial statements such as unsatisfactory revenue
figures in 2001, reporting of excessive personal loans to the executives and board members to
protect the prices of stock etc.( Lyke & Jickling, 2002).
How could this fraud have been prevented?
Implementation of proper code of ethics and open door good corporate governance practices
could have been implemented. Positive work environment for the employees could help the
company to avoid such scandal as they were directly involved.
Have the accounting rules changed since that fraud was committed?
The disclosure requirements under financial reporting have been made quite detailed under
various accounting standards. The accounting rules have been made more stringent to deal
with the capital expenditures.
REFERENCES:
Lyke, B., & Jickling, M. (2002, August). WorldCom: The accounting scandal.
In Congressional Research Service Report for Congress, August (Vol. 29, pp. 1-6).
Yallapragada, R. R., Roe, C. W., & Toma, A. G. (2012). Accounting fraud, and white-collar
crimes in the United States. Journal of Business Case Studies (Online), 8(2), 187.