The WorldCom Accounting Scandal
The WorldCom Accounting Scandal
WorldCom was started in Mississippi as a long distance telephone service provider in 1983 (Lyke and Jickling, 2). Over the next decade and a half, the company expanded to offer a whole range of telecommunication services through a series of mergers and acquisitions (Lyke and Jickling, 2). At its height, WorldCom was the largest long distance phone company in the United States and was one of the leading companies in the telecommunication market in the world, providing both local and long distance telephone services, internet service, data and web hosting to businesses (Lyke and Jickling, 2). As the dot-com bubble began to burst and the economy was entering a recession, WorldCom, like a number of other telecommunications companies, faced financial troubles (Lyke and Jickling, 2).
Under the pressure of declining profit and market expectations of continuing growth, top management at WorldCom began to manipulate its accounting reports in an attempt to avoid or delay market losses (Lyke and Jickling, 1). Accounting fraud was committed in mainly two ways. First, over $3.8 billion of “line cost,” or payment made to other companies for use of their communication networks, was classified as capital expenditures rather than current expenses (Lyke and Jickling, 2). Since expenses were understated and capitalized expenses were treated as an asset, WorldCom was able to increase both its net income and asset and cover up the fact that the company had actually been experiencing net losses. This maneuver also allow WorldCom to spread out its line costs over future years, as capitalized expenditures are depreciated over their lifetime (Lyke and Jickling, 3). On June 25, 2002, WorldCom made the public announcement about this misclassification and that it would be restating its financial statements for 2001 and the first quarter of 2002 (Lyke and Jickling, 1). In August, further audit and investigation revealed that the company had also been
WorldCom was started in Mississippi as a long distance telephone service provider in 1983 (Lyke and Jickling, 2). Over the next decade and a half, the company expanded to offer a whole range of telecommunication services through a series of mergers and acquisitions (Lyke and Jickling, 2). At its height, WorldCom was the largest long distance phone company in the United States and was one of the leading companies in the telecommunication market in the world, providing both local and long distance telephone services, internet service, data and web hosting to businesses (Lyke and Jickling, 2). As the dot-com bubble began to burst and the economy was entering a recession, WorldCom, like a number of other telecommunications companies, faced financial troubles (Lyke and Jickling, 2).
Under the pressure of declining profit and market expectations of continuing growth, top management at WorldCom began to manipulate its accounting reports in an attempt to avoid or delay market losses (Lyke and Jickling, 1). Accounting fraud was committed in mainly two ways. First, over $3.8 billion of “line cost,” or payment made to other companies for use of their communication networks, was classified as capital expenditures rather than current expenses (Lyke and Jickling, 2). Since expenses were understated and capitalized expenses were treated as an asset, WorldCom was able to increase both its net income and asset and cover up the fact that the company had actually been experiencing net losses. This maneuver also allow WorldCom to spread out its line costs over future years, as capitalized expenditures are depreciated over their lifetime (Lyke and Jickling, 3). On June 25, 2002, WorldCom made the public announcement about this misclassification and that it would be restating its financial statements for 2001 and the first quarter of 2002 (Lyke and Jickling, 1). In August, further audit and investigation revealed that the company had also been