Creative Accounting

Discuss how world com used creative accounting to portray that the company’s profit were increasing when it fact it was making losses during the period 2000 – 2002

Creative accounting can be refers to accounting practices that seem to follow the applicable accounting standards but differ from the essence of those standards. It use the accounting methods to hide some elements of company’s financial dealings in order to make the company appears more successful that it is in reality. Creative accounting also can be describe as the transformation of financial accounting figures from what they actually are to what they were desire by taking advantage of the existing rules or ignoring some or all of the standards. Usually, the expectation of rewards and higher incentive compensative for executive management motivates a person to involve in creative accounting. Some of the creative accounting schemes that committed by companies include improper revenue and expenses recognition, faulty accounting in connection with business combination and wrongful us of off-balance-sheet arrangements.

WorldCom was use creative accounting in order to make the financial accounting records to look good which is the profit increasing. They was used a liberal interpretation of accounting rules when preparing the financial statements. While the company acquiring MCI, it give the management opportunity to make the creative accounting. WorldCom had devalued hard assets while simultaneously increasing the amount of goodwill of MCI. Goodwill is an intangible asset which include brand name. In USA GAAP, the goodwill is the different between the acquisition prices and fair value of identifiable assets. This enables the WorldCom each year to change a smaller amount against earnings by spreading these large expenses over decades rather than years. The net result was WorldCom’s capability to cut annual expenses, acknowledge all MCI revenue and boost profit from the...