StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Identifying and Describing the Ethical Issue. Worldcom - Essay Example

Cite this document
Summary
The major ethical and legal issue regarding Worldcom's accounting manipulations stem from the fact that the company decided to treat $3.8 billion in everyday expenses from its operating accounts relating to a Sprint merger as capital investments…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER97.6% of users find it useful
Identifying and Describing the Ethical Issue. Worldcom
Read Text Preview

Extract of sample "Identifying and Describing the Ethical Issue. Worldcom"

? Identifying and Describing the Ethical Issue A) The major ethical and legal issue regarding Worldcom's accounting manipulations stem from the fact that the company decided to treat $3.8 billion in everyday expenses from its operating accounts relating to a Sprint merger as capital investments. The company manipulated the company's financial results in order to meet Wall Street expectations and artificially inflate their stock price amidst declining financial performance. Treating operational expenses as capital investments inflated the company's operating income since expenses are supposed to be accounted for in the quarter that they are incurred, instead of being spread out over a period of years. In this case this illegal accounting practice allowed Worldcom to treat operational expenses that should have been fully recognized each operating quarter as a long term capital expenditure, where related costs are expensed during the operating lifetime of a specific asset instead of being accounted for during one specific accounting period. As a result three former Worldcom executives were convicted of accounting fraud. David Myers, the third executive in command and Worldcom's former controller, was convicted to one year and one day in prison. The former controller received a much lesser sentence than the other executives due to his early admission of responsibility and remorse as well as extraordinary cooperation with the government in exposing the extent of the fraud including the major players involved (Cbsnews, 2009).Scott D. Sullivan, Worldcom's former chief financial officer, was convicted to five years in prison as part of a plea agreement in which he testified against the company's CEO Bernard J. Ebbres. Bernard Ebbres was eventually convicted to 25 years in prison for the Worldcom accounting fraud ultimately leading to the company's bankruptcy (Sullivan, 2013). In 2001Worldcom reported $7.7 billion in cash flow from operating activities instead of the true amount of $4.6 billion as a result of misrepresenting $3.8 billion of operational expenses resulting from the Sprint merger. Mr. Sullivan failed to inform Arthur D. Anderson, the firm's accountant at the time, of his decision to treat the expenses as capital expenditures in a clear and blatant attempt to disguise his illegal accounting manipulations from the accounting firm. This deceptive accounting manipulation resulted in the company overstating its EBITDA (earnings before interest, taxes, depreciation and amortization) which is the barometer that most investors utilize to evaluate a company's overall financial health and performance. As the company started the accounting fraud in the first quarter of 2001, Worldcom reported an EBITDA of $2.1 billion instead of $1.4 billion. By the end of 2001 the company had originally reported an EBITDA of $10.5 billion instead of the correct figure of $6.3 billion. Consequently Worldcom reported a profit of $1.4 billion for 2001 and $172 million in the first quarter of 2002, where in reality the company had loses amounting to billions during that accounting period (Eichenwald, 2002). This accounting fraud directly violates the accounting principles of reliability in accounting practice, as well as the “full disclosure” and the “matching” principle, where all expenses incurred during an accounting period are matched with the period revenues which it directly affects (Businessweek, 2002). Explaining Alternative Courses of Action and Related Trade-Offs B) Troy Normand, as the manager for the corporate reporting department, was responsible of the accuracy and reliability of corporate financial reports. Based on his testimony and full account of the conversation with Scott Sullivan regarding the events that transpired, we can conclude that Mr. Normand was in full knowledge and understood the implications and illegal nature of the accounting treatment given to the Sprint merger expense accounts. Therefore his actions regarding the treatment of the Sprint expense accounts was both unethical and illegal based on GAAP (generally accepted accounting principles) as well as legal reporting requirements outlined by the FASB (Financial Accounting Standards Board) (Kieso & Weygandt, 1998). C) Troy Normand as an accountant should have insisted to Mr. Sullivan to provide concrete evidence that the expense accounts were overstated and to launch an internal inquiry to prove the accuracy of the expense accounts. If none of these requirements were accepted by Mr. Sullivan his responsibility should have been to follow the chain of command and report his concerns directly to the CEO Bernard J. Ebbres, and if no satisfactory result was achieved he should have reported the findings directly to the Board of Directors. Until a satisfactory alternative to an internal review regarding the treatment of the expense accounts was presented, Mr. Normand was obligated to continue to treat the Sprint expense accounts as an operational expense. Additionally he was obligated to provide notes in the financial statements providing full disclosure regarding the internal review being performed by the company. Of course the company would have incurred in operating losses for 2001 and first quarter 2002, but it would have provided stakeholders with the transparent, accurate and reliable financial information necessary to derive investing or financing decisions (Garrison & Noreen, 2003). Identifying Major Stakeholders and Explaining the Related Consequences to Major Stakeholders D The major stakeholders in this case would be the common stockholders, bondholders, and financial institutions providing financing to Worldcom. Inevitably as a result of the Sprint acquisition and the unforeseen expenses derived from this merger the company would have ended up reporting operating losses for 2001 and first quarter 2002. Consequently investors as well as financial institutions would view the stock as a riskier investment and much less desirable investment compared with the historic financial performance of Worldcom. The stock price would have dropped significantly during this period, but it would have provided an accurate picture of its finances and ability to continue operations. Additionally the price of its corporate bonds would have dropped due to the significant additional risks related to the Sprint acquisition and operational efficiency of the merger. Finally the overall costs of acquiring additional capital for operations or expansion from financial institutions would have increased significantly due to higher interest rates requirements for loans and lines of credit. Ultimately for the company it would have been better to provide stakeholders with accurate financial reporting information instead of destroying the reputation of Worldcom as well as eroding the reliability and trust investors and stakeholders place in the financial markets and corporate financial reporting as a whole. References Businessweek.com (2002). How to Hide $3.8 Billion in Expenses. Businessweek. Retrieved November 9, 2013 from http://www.businessweek.com/stories/2002-07-07/how-to-hide-3-dot-8-billion-in-expenses Cbsnews.com (2009). Former Worldcom Exec Gets Prison. Retrieved November 9, 2013 from http://www.cbsnews.com/2100-201_162-770079.html Eichenwald, K. (2002). 2 Ex-Officials at Worldcom are Charged in Huge Fraud. The New York Times. Retrieved November 9, 2013 from http://www.nytimes.com/2002/08/02/business/2-ex-officials-at-worldcom-are-charged-in-huge-fraud.html?pagewanted=all&src=pm Garrison, R., Noreen, E. (2002). Managerial Accounting (10th ed.). Boston: McGraw-Hill Irwin. Kieso, D., Weygandt, J. (1998). Intermediate Accounting (9th ed.). New York: John Wiley & Sons. Sullivan, S. (2013). Scott Sullivan biography. Retrieved November 9, 2013 from http://www.biography.com/people/scott-sullivan-235388 Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Identifying and Describing the Ethical Issue. Worldcom Essay”, n.d.)
Identifying and Describing the Ethical Issue. Worldcom Essay. Retrieved from https://studentshare.org/finance-accounting/1489940-identifying-and-describing-the-ethical-issue-worldcom
(Identifying and Describing the Ethical Issue. Worldcom Essay)
Identifying and Describing the Ethical Issue. Worldcom Essay. https://studentshare.org/finance-accounting/1489940-identifying-and-describing-the-ethical-issue-worldcom.
“Identifying and Describing the Ethical Issue. Worldcom Essay”, n.d. https://studentshare.org/finance-accounting/1489940-identifying-and-describing-the-ethical-issue-worldcom.
  • Cited: 0 times

CHECK THESE SAMPLES OF Identifying and Describing the Ethical Issue. Worldcom

Creative Accounting

In other words it is the process of identifying, measuring, handling and communicating the financial information about different economic entities for being used by the concerned parties.... The globalisation regime has brought about many changes to the corporate landscape.... Intense amount of competition amongst the rival brands and companies is one such change which has benefitted the consumers in general....
14 Pages (3500 words) Essay

Accounts Manipulation

The case of worldcom The concept of evolution of worldcom as a company happened in the year 1983 in Mississippi.... After some years the company was renamed as worldcom.... Firms may window-dress the financial statements in order to show a rosy picture of their accounts....
9 Pages (2250 words) Essay

Responsibilities that Impacts WorldCom

When the company merged with Advantage Companies, Inc, the company's name became LDDS worldcom in 1995.... In April 14, 2003, the name of the company was… 1 A lot of companies were bought by worldcom in the past.... The companies that were merged with worldcom were Advanced Communications Corp.... worldcom also acquired the mother company of Digex – the Intermedia Communications and sold all of its intermedia's non-Digex assets to Allegiance Telecom....
5 Pages (1250 words) Essay

Financial Position of Enron Corporation of Houston

The ability to respond to the needs of the customer by identifying them is the most important strength of Enron.... In such a case the author describes Enron's Financial Position.... the whole exercise of analyzing the statements becomes useless.... Window-dressing is also done to forecast a better picture to shareholders, bankers, and financial institutions....
5 Pages (1250 words) Case Study

History of WorldCom

These unethical issues and different management techniques recommended to improve the corporate governance of worldcom would be outlined in this essay "worldcom".... These unethical issues and different management techniques recommended to improve the corporate governance of worldcom would be outlined in this essay (Backover 2002; Crawford 2005).... It is believed generally that because of these practices of integration worldcom was successfully able to hide its practices....
7 Pages (1750 words) Essay

Business Ethical Failure: Worldcom

A good example that demonstrates a failure of corporate governance at this early age of the century is the worldcom case that this research aims at analyzing and recommending possible remedial measures that can assist in restoring ethical behavior in the corporations.... nbsp; Upon the disclosure of massive accounting irregularities, worldcom, which was the second biggest telecommunication company in the world, filed for insolvency in the summer of 2002 in the federal court of Manhattan....
9 Pages (2250 words) Research Paper

Business Ethics of WorldCom

Impact of the ethical problem The fraud that led to the bankruptcy of WorldCom affected the behavior and the lives of individuals and the community that the industry operated.... The essay "Business Ethics of worldcom" analyzes the facts that relate to business ethics challenge in worldcom.... The issue that is also to be discussed is the important events in the industry that worldcom operated and the effects that the company brought to its competitors and to the labor market....
3 Pages (750 words) Essay

Success of WorldCom

The paper 'Success of worldcom' presents worldcom which appeared to be a great success story.... In October 1999, worldcom attempted to purchase Sprint in a stock buyout for $129 billion in stock and debt.... worldcom's 2002 has been a horror story with accounting scandals, SEC investigations, the resignation of CEO Bernard Ebbers, possible bankruptcy, and a stock that is worth less than a payphone call.... n June 2002, the Securities and Exchange Commission (SEC) lawyers filed civil fraud charges against worldcom for what would later be estimated at over $9 billion worth of accounting errors....
9 Pages (2250 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us