Worldcom Fraud Essay

The fraud was perpetrated in two ways. First, reserve accounts were drawn down to boost earnings. However, when the reserve accounts eventually ran out of money, Scott Sullivan ordered the accounting staff to treat line costs, which should have been treated as expenses, as capital assets. This accounting treatment was against the Generally Accepted Accounting Principles, which should have been used by WorldCom’s accounting department. By classifying the line costs as capital expenditures instead of expenditures, WorldCom was able to write off the line costs over a longer period of time giving the company an instant boost to current profits while showing an increase to assets in the balance sheet. In total, the financial statement fraud committed …show more content…
According to Cooper, the partner in charge of the engagement didn’t seem concerned about the fact that the corporate accounting team was reversing allowance entries. In fact, he assured Cooper that based on Arthur Anderson’s audit tests; WorldCom’s allowance was greater than the required reserves in other areas of the company. Therefore, WorldCom as a whole had the required allowance reserves. Cooper also brought the issue to Scott Sullivan the CFO. During her conversation with Sullivan, he tried to convince her that he had taken a close look at the situation personally, and that the allowance reserves were adequate from a company wide perspective. She also mentions at one point, that Sullivan tracked her down outside of the office and reprimanded her for asking Arthur Andersen about the allowance accounts. According to Cooper, Scott Sullivan’s behavior during and after the discussion of the issue pushed her instinct to investigate further. Cooper instructed her team to review Arthur Andersen 's audit work papers detailing the allowance testing they had performed. The team concluded that the allowance was not over in other areas of the company as they had been led to believe by Sullivan and the Anderson