Accounting Fraud At WorldCom Descriptive Essay Help

Introduction

In 2001, WorldCom falsified their financial statements to indicate a profit of $1.4 billion, despite the company's actual loss (USAToday, 2003). Instead of subtracting some expenses from revenue, the corporation classed them as long-term investments. In addition to accounting fraud, other factors such as corporate culture, pressure on accountants to book and release accruals, and the CEO's ambition to make the company's stock number one on Wall Street all contributed to a significant fraud. This paper addresses a few of the related concerns.

Corporate Culture

The most significant feature of corporate culture that contributed to the accounting fraud at WorldCom was the mindset of organizational members at all levels to adhere to the idea of not challenging superiors and just carrying out orders. Employees believed they lacked an impartial forum for voicing their complaints with the company's rules and officials' conduct. Many of the employees were ignorant of the existence of an internal audit department, nor did they believe that it was a division with the authority to question the integrity of financial transactions. There were no concerns raised by the HR department regarding unusual compensation adjustments, bonuses, and other benefits given to a subset of employees, particularly those in the finance, accounting, and investor relations departments.

CEO's Ambition to Be the No. 1 Stock on Wall Street

CEO Sullivan believed that this was the only way to keep WorldCom's stock at the top of Wall Street's rankings. Therefore, the corporation has always prioritized revenue development in all of its endeavors. The CEO urged the managers to spend whatever was necessary to generate revenue for the company, even if the long-term costs of a project greatly outweighed the project's short-term advantages. To maintain the number one position of the stock, every action was taken with just revenue growth in mind. When industry conditions began to deteriorate in the year 2000 due to increased competition, industry overcapacity, and a decline in demand for telecommunications services as a result of the recession and the dot-com bubble, WorldCom found it difficult to maintain the most crucial performance indicator of line-cost expenditure to revenues. The corporation was unable to maintain the expenditure-to-revenue (E/R) ratio of 42% from the first quarter of 2000 in consecutive periods. Due to the downturn in business operations, the chief executive officer decided to employ accounting entries to achieve the desired performance and maintain the stock value.

Constraints on Accountants

WorldCom's accountants were under pressure to include $828 million in line accruals in the income statement. Although the accountants refused to do this on the grounds that it was not proper accounting procedure, their manager assured them that similar occurrences would not occur again. The accountants contemplated quitting their positions. However, CEO Sullivan persuaded them that he would be accountable for such decisions and urged them to remain with the company. While the accountants had doubts about these accounting procedures, they believed that the chief executive officer knew what he or she was doing. Next, the chief executive officer instructed the accountants to transfer $771 million from line costs to capital expenditures for the second quarter of 2001. Throughout 2001, it was necessary to make such entries to supplement the profits. In 2001, however, accountants incorrectly accounted for $818 million in expenditures as investments and discontinued the practice. In general, accountants would have fought such methods and exposed the CEO and executives who pressured them to engage in such improper accounting procedures, regardless of the employment or financial consequences. That would have saved the investors substantial sums of money.

Arguments for and against whistleblowing

If a person decides to disclose frauds or malpractices within an organization, he or she may have to face the repercussions of betraying the employees' trust. Second, there is a possibility that the whistleblower will become the wrongdoer's enemy (UniversityofLethbridge, 2003).

On the plus side, there is a distinct prospect of acting in the public interest to prevent unwarranted financial losses for countless individuals unwittingly trading in the shares of unethical firms.

The Accounting Profession's Reputation When Corporate Fraud Is Identified

When corporate fraud is exposed, it is only inevitable that the accounting profession's credibility will suffer in a significant way. Before criticizing accountants or the accounting profession, it is necessary to assess the conditions under which accountants were compelled to involve clients in accounting scams. This sort of accounting fraud is typically committed by a small number of greedy accountants, who are the black sheep of the profession. The profession as a whole cannot be assessed and stigmatized based on the actions of a few individuals.

References

LethbridgeUniversity (2003). Business Ethics – Chapter 1: Whistle Blowing. Online.

USAToday. (2003). Web site: Accounting Fraud

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