Essay on Worldcom Accounting Scandal
The rationale given for making this entry was that DiCicco would eventually find $150 million in savings from disputed billings to WorldCom. It is clear that this is in clear violation of GAAP.
In the White Paper presented to the Board of Directors, the CEO Scott Sullivan supported the decision to capitalize line costs. The rationale provided was that this was in line with the company’s goal of maintaining strong growth rate through increasing its capital investment. The company was willing to absorb these costs prior to recognising the related revenues associated with these costs, in accordance with the provisions of SAB 101 and FASB 91. The idea of deferring costs was justified on the basis and to the time of realisation of the realisation of future economic benefit associated with it. Further, the management noted that this treatment of these costs as an asset was in no way in any contradiction of the definition of an asset as per FASB Concept Statement No. 6 whereby, “ Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events”.
However, as per GAAP, line costs must be reported as an expense in the company’s income statement as these are fundamentally, operating expenses.
It was put in the Balance Sheet as an accrued liability rather than