Ac557 Unit 1 Worldcom Case Study

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WorldCom Case Study

Kaplan University

AC557-01: Internal Control Assessment and Design

Unit 1 Assignment

February 2015 Term 1501D

WorldCom Case Study

WorldCom, Inc. announcement on June 25, 2002 that their profits were inflated by $3.8 billion over the last previous five quarters sent the financial markets into a whiplash tail spin following Enron’s dismal fall in 2001. WorldCom, the second largest U.S. telecommunication company at the time, committed the largest accounting fraud scandal in history through very basic accounting manipulations of capitalization of line cost expenses and reversal of accrued liabilities to maintain their expense-to revenue (E/R) ratios for stock pricing on Wall Street. This case study will discuss the pressures that lead executives and managers to “cook the books”, the boundary between earnings management and fraudulent reporting, why detection of fraud was not found earlier and the processes that should be in place to prevent or detect the types of actions that occurred at WorldCom, the expectations about governance processes performed by external auditors and the board of directors, and the pressure and consequences when middle managers follow orders that they know are wrong.

WorldCom’s first operations began in 1984 as Long Distance Discount Services (LDDS) offering services to local retail and commercial customers. In 1985, Bernard Ebbers, one of LDDS original nine investors, become the CEO and began acquiring other long distance companies and consolidated “third-tier long-distance carriers with larger market shares” (Kaplan & Kiron, 2007, p. 2). Ebbers growth strategy focused on acquisitions and mergers to ramp up revenues and bolster asset capacity in support of expected growth. In a statement by Ebbers in 1997 to Fortune, “Our goal is not to capture market share or be global. Our goal is to be the No. 1 stock on Wall Street” (Kaplan & Kiron, 2007, p. 4). He perceived market value as the company’s...