Impact of Accounting Fraud: WorldCom's Financial Statement Analysis

This assignment analyzes the financial scandal of WorldCom, a US telecommunications company that went bankrupt in 2003 due to fraudulent accounting practices. The analysis focuses on how the company inflated profits by misreporting expenses as capital expenditures, thereby increasing reported profits. It examines the impact of these manipulations on the income statement, the misrepresentation of financial information to stakeholders, and the definition of revenue and income. The assignment also discusses factors influencing the format of the income statement and the importance of consistent financial reporting standards for global comparison. The document references the impact of these misrepresentations on stakeholders and the broader implications of such accounting fraud, including the manipulation of financial data to deceive investors and stakeholders. The assignment also provides insights into the impact on the income statement and the role of accounting standards in maintaining transparency and comparability in financial reporting.

Part B
Discussion A
Answer 1
World come between US based telecommunication company. The company was established in
the year 1963. The company was among the second largest long distance provider in the United
States. The company in the year 2003 went into liquidation. The main reason behind the
bankruptcy of the company was because of inflation of profits worth $ 4 billions through
deceptive accounting system adopted by the company. It has been proved that the chief financial
officer of the company was engaged in improper recording of expenses as investment so as to
inflate the profit numbers of the company which could attract the interest of the investors and
shareholders towards the company.
In the given case, WorldCom, a US telecommunications firm ,in June 2002, has misreported
their financial information in the prior accounting years. A sum amounting to USD $ 3.9 bn has
been reported as they are considered as capital expenditures in the books of accounts irrespective
of its nature which is of routine operating expenses and hence relates to recurring revenue nature.
As a result of this misrepresentation of the expenses in books of accounts the profits of the
company has increased. Being the revenue nature expenditure has not been charged to profit and
loss account as they are recorded as capital expenditure, the profits for the year has increased. On
the other hand been the same was treated as capital expenditure for the US telecommunication
firm so it was also made eligible for depreciation in the financial statement which in turn has
reduced the profit but overall the profit numbers of the US telecommunication has increased for

the year. In the given situation the financial performance of the company improve along with its
financial position.
This can be well understood through the help of an example. In the above case world com has
transferred a recurring expense of 3.9 billion dollars as capital expenditure. As a result of the
section the profits of a company get increased by 3.9 billion dollars. Being the capital
expenditure of the company has increased by 3.9 million dollars, it is assumed that the same is
added to the gross block of fixed asset whose rate of depreciation is 15%. In this scenario, the
company will charge depreciation on the amount that has been transferred to the capital
expenditure head. Thus, 0.59 billion dollars ($3.9 bn *15%) will be charged to profit and loss
account. Thus overall, the company saved $3.31 billion dollars from getting charged to the profit
and loss account of the company. This has inflated the profit numbers of the company.
Answer 2
In case of world com it has been proved that the chief financial officer of the company has made
some manipulation worth 4 billion dollars to inflate the profit numbers of the company. This
change in accounting policy of the company has been done by the management with an intention
to hide the actual financial position of the company from the shareholders and stakeholders of
the company. The management transferred the expenses amount to investment head to
manipulate the profit numbers. Thus, overall we change has been done to cheat the investors and
stakeholders of the company.
Answer 3
From the miss representation that has been taken place by the management of worldcom
company has impacted the shareholders and stakeholders of the company. The management has

misrepresented the financial numbers which has done with an intention to hide the actual
financial position from the users of the financial statements of a company. The uses of the
financial statement include creditors, lenders, the probable investors, the government and
regulatory authorities.
Discussion B
Answer 1
Income for a company is required to an amount has been received by a company because of its
work or on account of any investment that has been made by the company on its behalf. For a
company income is the amount that has been received in exchange of goods and services which
has been manufactured or delivered by the company. The core business activity of a company
refers to the activities for which the company has been set up. Any income that has been
generated by the company on account of carrying out its core business activities will be covered
in the definition of revenue generation activities of the company. All the other activities through
which the company has able to generate income will be covered under the head of other income.
For a income statement, income refers to be net income or net profit which is the last item of the
statement. It refers to the net amount that has been earned by the company after considering all
its expenses related to operational, financial or investment. It refers to the net amount in cash
which is left with the company after considering all the expenses and losses. In the given case,
all the above 5 transactions does not satisfy the condition of income.
In the given case, the company has been engaged in the business of sale of antivirus software
during the financial year the company has made a sale of $25,000,000 from the sale of software,
$3,000,000 from update downloads and $50,000 as interest income from investing on the short-

term money market. The company has also received $2,000 discount on account of early
settlement of a liability. The Company during the financial year has issued shares worth
$500,000. Out of the above transactions, All the transactions which has been provided in the
case, may ultimately will lead to generation of net income. All these transactions are required for
generation of net income but directly they cannot be termed as net income for the company.
Answer 2
On the other hand revenue is the top most items in the income statement of the company.
Revenue refers to the amount that has been generated by the company from sale of goods and
services or the products in which the company is dealing in. However there are many companies
who have different sources of income as well, but income that has been generated from all these
sources will not be covered under the definition of income and will be classified in other income
head in income statement of the company.
Out of the four heads which has meet out the definition of income for the company, the
transaction related to sale of anti-virus software and software upgrade will be covered in the
definition of revenue generation activities for the company. Being, the core business of the
company is to set antivirus software so any activity which has a direct relation could this core
business activity will be covered in the definition of revenue generation activity for the company.
Being sale of software and software upgrades both meets out this condition thus it will be
considered as the core revenue generation activities of the company.
Discussion C

Income statement refers to a statement which provide information about the revenue
numbers ,expenses and the final net income or net profit of the company. The format of the
income statement is generally fixed however certain open line items are being kept for the
companies keeping in mind the nature and complexity that me sometime arise which may require
the management of the companies to make change in the format of the income statement.
However it is not very easy for the regulator to make a change in the format of the financial
statements.
There are number of factors which may influence the format and content of the income
statement. Income statement of a company should provide a clear view to the stakeholders and
shareholders of a company which is important for the decision making in relation to investment
in the company. Thus, any change which is required in relation to providing any further
information to the stakeholders and shareholders of a company is welcomed and may let to
change in the format. Any change which is required by law or by statute may also let to change
in the format of the income statement. Further, you can change any format is required for better
presentation of the numbers in the financial statements can also be accepted and may lead to
change in the format. In the current scenario for the purpose of comparison between companies
globally it is very important that the formats of financial statement between the companies are
consistent. Result of this it is important that the accounting standards provide clear demarcation
of the formats of financial statements for the companies. In this scenario if any change in the
format has been projected by the international financial reporting standards then it is important
for the other countries standards to adopt these changes in their format as well.
However it is not always possible for setting that the changes that have been made in the
international financial reporting standards are being accepted by the other countries. There are

many different factors specially in the regulations of the country which should be in line with the
International financial reporting standards before accepting the changes in the format of the
financial statements of the companies. In the scenario the changes proposed that by the
international community is not accepted or accepted with change by the regulator in the other
countries.
Considering all these points, it is accepted that any change in the format of the income statement
can be done majorly with an intention to provide better information to the users of the financial
statements of the company. Better presentation and understanding of the financial statements are
the core reasons which may increase the probability of making changes in the format of the
statements.
Bibliography
Anon., 2005. WorldCom goes bankrupt. [Online] Available at:
https://www.theguardian.com/world/2002/jul/22/qanda.worldcom [Accessed 26 Sept 2017].
Bauwhede, H.V., 2001. Factors influence Fianncial statments. [Online] Available at:
http://venus.unive.it/bauhaus/Heidi%20Vander%20Bauwhede.PDF [Accessed 26 Sept 2017].
Gartenstein, D., 2016. What Are the Four Things That Would Have the Most Impact on Your
Profit and Loss Statement? [Online] Available at: http://smallbusiness.chron.com/four-things-
would-impact-profit-loss-statement-36212.html [Accessed 26 Sept 2017].