ACCT7102 Assignment
ACCT7102 Case Study- WorldCom
1.0 Background
WorldCom as one of the world’s largest telecommunications companies, filed for bankruptcy on
2012 after numerous accounting irregularities were disclosed. It is essential for us to analyze the several underlying issues from WorldCom case to avoid its repetition. The origin of WorldCom can be traced to a LDDS provider in 1983 and it became officially known as WorldCom in 1995. The company maintained a rapid growth through a series of acquisitions using highly valued stock, which provided substantial international presence and competitive advantage. However, company’s earnings began to slip in 2000 and market condition became worse due to increased competition and reduced demand. Under this situation, to maintain its E/R ratio and meet Wall Street earning target, the company utilized accounting techniques to manage its earnings.
2.0 Identification of issues
Following issues are identified and analyzed in this report:
Issue 1: What factors motivate managers in WorldCom to engage in earning management?
Issue 2: Whether or not WorldCom crossed line from earnings management to fraudulent reporting?
Issue3: Why were the actions of WorldCom managers not detected over a long time?
Issue4: Why Cooper and Vinson’s actions are so different in terms of ethical values?
3.0 Analysis of Issues in WorldCom
3.1 Earning Management
Earning management is defined as “the process of taking deliberate actions within the constraints of
GAAP so as to achieve a desired level of reported earnings” (Koumanakos, 2005, p. 31). It is closely associated with three factors which are existence of motivation, availability of earning management tactics and weak corporate governance which encourages earning manipulation
(Kassem, 2010). There are different ways for managers to engage earning management. For example, accounting judgment can be used by managers to make financial report more informative for users. They also can choose make or defer expenditure
1.0 Background
WorldCom as one of the world’s largest telecommunications companies, filed for bankruptcy on
2012 after numerous accounting irregularities were disclosed. It is essential for us to analyze the several underlying issues from WorldCom case to avoid its repetition. The origin of WorldCom can be traced to a LDDS provider in 1983 and it became officially known as WorldCom in 1995. The company maintained a rapid growth through a series of acquisitions using highly valued stock, which provided substantial international presence and competitive advantage. However, company’s earnings began to slip in 2000 and market condition became worse due to increased competition and reduced demand. Under this situation, to maintain its E/R ratio and meet Wall Street earning target, the company utilized accounting techniques to manage its earnings.
2.0 Identification of issues
Following issues are identified and analyzed in this report:
Issue 1: What factors motivate managers in WorldCom to engage in earning management?
Issue 2: Whether or not WorldCom crossed line from earnings management to fraudulent reporting?
Issue3: Why were the actions of WorldCom managers not detected over a long time?
Issue4: Why Cooper and Vinson’s actions are so different in terms of ethical values?
3.0 Analysis of Issues in WorldCom
3.1 Earning Management
Earning management is defined as “the process of taking deliberate actions within the constraints of
GAAP so as to achieve a desired level of reported earnings” (Koumanakos, 2005, p. 31). It is closely associated with three factors which are existence of motivation, availability of earning management tactics and weak corporate governance which encourages earning manipulation
(Kassem, 2010). There are different ways for managers to engage earning management. For example, accounting judgment can be used by managers to make financial report more informative for users. They also can choose make or defer expenditure