Worldcom: the Final Catalyst

WorldCom: The Final Catalyst

Discussion of ethical issues

1. Describe the mechanisms that WorldCom’s management used to transfer profit from other time periods to inflate the current period.

WorldCom created excess reserves or provisions for future expenses, Overstatements occulted that affected the balance sheet rather than the income statement by offsetting capital transfers or charging against capital accounts for line cost that should have been expenses.

which they later released or reduced, thereby adding to profits. The manipulation of profit through reserves or provisions is known as “cookie jar” accounting. According to the SEC first, WorldCom improperly released certain reserves held against operating expenses. Second, WorldCom improperly re-characterized certain operating costs as capital assets.

2. Why did Arthur Andersen go along with each of these mechanisms?

I believe the Arthur Andersen auditor lost its independence when conducting the WorldCom audit. Two members of upper management were previous employees of Arthur Andersen made personal. And the fact that Andersen’s focus was on providing non-auditing services to management.

Authur Andersen went along with each of these mechanism because:

a. there were driven by revenue

b. they wanted to maintain WorldCom as a client

c. there were arrogant by thinking they would be caught and punished.

d. conflict of interest, they felt more responsible to the client rather than the upholding their fiduciary responsibilities.

e. not adhering to their internal controls.

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

WorldCom’s board of directors should have prevented the manipulations that management used by establishing a code of ethics. This also could have been adverted by reviewing and comparing the financial statements carefully and once a discrepancy was noticed, the board of directors should have demanded for it to be corrected...

3. How...