Worldcom

World Com Case Study: Ethics in Accounting

WorldCom transferred profits by using “cookie jar” accounting which means that they created and inflated profits by revising statements and using their resources to “cook the books.” Expenditures were recorded on the balance sheet instead of the income statement; this disguised expenses and caused them to not have the effect on reporting income that they should have. A huge driving force behind these manipulations was the pressure for WorldCom to preserve the value of their stock. This caused top management to review quarterly reports and make journal entries that were improper and aided in the maintenance of the stock price, jobs and collateral. There were flaws in the system that should have prevented this and created a foundation to make sure that management was ethically looking out for the well being of the company and not their own self interests and job security.

Arthur Andersen when they first started had a solid foundation of training and ethical guidance. Once profits grew their professional client service turned into a profit-motivated business. Anderson became more concerned with pleasing their clients and maximizing profits instead of following ethical guidelines and standards. Also two members of WorldCom management had previously been employees at Arthur Anderson, this lead to conflicts of interest and the line between WorldCom and Anderson became fuzzy.

1. How should WorldCom’s board of directors have prevented the manipulations that management used?

The board of directors creates the bridge between management and the shareholders. They play a very important role and should have been reviewing financial statements carefully in order to find discrepancies and make sure that all corrections were caught and made.

2. Bernie Ebbers was not an accountant so he needed to cooperation of accountants to make his manipulations work. Why did WorldCom’s accountants go along? To meet wall street...