The WorldCom Scandal

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the background of & how the fraud was perpetrated;
. Why the fraud remained undetected and the measures that could prevented or detected the fraud
. The concluding section comprising analysis, observations and comments on the WorldCom scandal, the accounting practices and other related issues

I. Facts

Background:

In the 1990s, WorldCom entered into a number of long-term lease agreements with various third party telecommunication companies in order to gain access to their networks. According to the terms of the agreements, WorldCom was obliged to pay a fixed amount to the carriers, regardless of how much of the leased capacity was actually utilized by WorldCom. These lease payments were named "line costs" and as per the prevailing accounting principles should have been treated as "operating expenses" in the income statements of the company. ("Complaint by SEC...," 2002). By 2000, the optimistic growth projections in the telecomm sector had failed to materialize, and ...

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(Ibid.) Such manipulation of accounts involving the false understating of "line costs" and reduction of the corresponding reserve account continued unabated in all subsequent income statements until the fraud was discovered in the 1st quarter of 2002. Such drawing down of the company's reserve account could obviously not be sustained indefinitely. Hence, from April 2001 onwards a slight change was effected in the method of making false entries in the company's accounts. In addition to understating the "line costs" through improper releases from the reserve account, WorldCom through fictitious entries started to transfer part of its line cost expenses to its capital asset accounts. ...

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