Assignment 1_worldcom Inc

Assignment 1_worldcom Inc - WorldCom achieved its position...

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WorldCom achieved its position as a significant player in the telecommunications industry through the successful completion of 65 acquisitions. Between 1991 and 1997, WorldCom spent almost $60 billion in the acquisition of many of these companies and accumulated $41 billion in debt. By 1997, WorldCom's stock had risen from pennies per share to over $60 a share. This success story was finally turned back when SEC officially filed fraud charges against WorldCom on June 26, 2002. In July 2002, WorldCom filed for bankruptcy protection after several disclosures regarding accounting irregularities. Among them was the admission of improperly accounting for operating expenses as capital expenses in violation of generally accepted accounting practices (GAAP). WorldCom has admitted to a $9 billion adjustment for the period from 1999 through the first quarter of 2002. In fact, WorldCom management utilized various techniques to mask their financial condition, but four in particular drove the major material misstatements: (1) categorizing operating expenses as capital expenditures, (2) reclassifying the value of acquired MCI assets as goodwill, (3) including future expenses in write-downs of acquired assets, and (4) manipulating bad debt reserve calculations. The cumulative impact of the four techniques resulted in enhanced perceptions of financial position and viability by reducing the key E/R ratio and boosting overall net income from operations. Cynthia Cooper’s role in uncovering the accounting fraud Cynthia Cooper is an American accountant who joined WorldCom in 1994, served as the Vice President of Internal Audit, with her team of auditors, worked together and often at night and in secret to investigate and uncover a historical fraud scandal. She was the key whistleblower in
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her company’s $3.8 billion accounting fraud case. Despite non-cooperation from colleagues, threats from seniors, undue pressure from management to lag behind, she sniffed out the discrepancies. Since joining Cooper faced a multitude of challenges. The WorldCom executives were entrepreneurs were focused on growing the company rapidly through acquisition. She had to educate management on the importance of implementing internal controls and developing a strong internal audit function as Bernie Ebbers, the CEO, was from non-business background. In 2002, as vice president of internal audit she discovered some suspicious entries in the company's books. During an internal audit of the wireless division, a senior vice president expressed concern that while accountants reporting to him were booking entries to increase the division's allowance, accountants reporting to the CFO were reversing the entries. He said the CFO assured him that the total company allowance was adequate. After investigating, Cooper’s team determined that the allowance appeared low by as much as several hundred million dollars, they identified a number of allowance accounts with balances going in the wrong direction and traced the entries that were being reversed through the system. Faced with the
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  • Winter '15
  • WorldCom, Accounting scandals

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