WorldCom's Accounting Fraud: Why is it Relevant Today?

WorldCom Fraud
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Institutional Affiliation
Question A
Over-stating revenues, profits and assets-along with devaluing liabilities are common financial statement fraud across the world. In 2001, WorldCom, an American telecommunications company, recorded one of the most dreadful and most massive accounting scandals that led to its bankruptcy. In this fraud, the company took over $3.8 billion in the form of operating expenses and falsely recorded them into property accounts -a type of capital expenditure. As such, the organisation was able to alter revenues and loss statement through the use of such dubious accounting practices (Cooper, 2009). By doing so, the organisation masked the actual net losses for the period as capital expenditure can be abstracted for a longer period. This was a gross violation of accounting rules that require companies to allocate expenses over the entire period they benefit the company.
Also, the company distributed expenses by reducing the book value of assets from acquired companies while concurrently increasing the amount of goodwill. Further, accountants neglected and undervalued receivable of these companies. These questionable practices created a perception as if the organisation financial position was improving every quarter. The trend continued, and every time the company acquired a new company, values of assets and expenses were adjusted accordingly. Research showed that such accounting practices dated as early as 1999. In 2001, for example, the company changed revenues to over $3 billion, allowing it to record $1.4 billion rather than a loss (Cooper, 2009). If the operating expenses were accurately recorded, the organisation would have lost its cash flows in the five quarters.
Question B
Popularized by the numerous accounting fraud, tone at the top has a significant impact on an organization’s values and cultural environment. It outlines management pledge to effective leadership, internal controls and ethics (Warren et al., 2015). In this respect, it calls for managers and executives to demonstrate high levels of honesty, integrity and ethical standards for juniors to emulate. As such, the model starts from the top-level management through the middle level and ultimately to the junior level. Research shows that company with sparse tones are more likely to have high rates of unethical behaviour, fraudulent activity as well as weak internal controls.
In this case, WorldCom shows weak tone at the top, thus explaining the regular accounting scandals. For example, WorldCom’s board of directors fraudulently advanced Bernard Ebbers $408 million loans, to cover up margin calls on loans that were secured by company stock (Cooper, 2009). The loan was advanced at a rate far lower than the national average. This scenario depicted that the company internal controls were weak as the loan violated certain accounting principles. Similarly, the company CFO Scott Sullivan and Arthur Andersen- Company outside auditor collaborated in the preparation and approval of ineffective internal controls.
Also, the CFO had authorized accountants to underreport line costs by capitalizing them into property accounts rather than expensing them. Research shows that when management fails to abid...