Essay on Worldcom Accounting Scandal

1241 Words 5 Pages
It has been noticed that during the accounting scandal of WorldCom, journal entries in the amount of $150 million and $771 million, respectively, were made by two General Accounting employees – Dan Renfroe and Angela Walter—without detailed support. Although, this was not out of the ordinary at WorldCom, this is not a correct accounting practice as it is against the basic principles of bookkeeping and accounting. This is because detailed support in the form of documentation is the key element in providing support to a journal entry and explains the reason or purpose why the journal entry was created in the first place. Such support is very important and relevant from the point of view of the persons reviewing the journal entry and those …show more content…
We know that reserves created for one expense cannot be used to offset another expense, as this is in violation of accounting principles.
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.
3.
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

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