Worldcom

Boundary between Earnings Smoothing or Earnings Management and Fraudulent Reporting

Earnings management is not an illegal act. It is a strategy used by the management of a company to influence or manipulate reported earnings by using specific accounting methods, such as deferring or accelerating expense or revenue transactions. This practice is carried out for the purpose of income smoothing. Thus, the company will be able to make its earnings relatively stable from year to year.

However, fraudulent financial reporting is an aggressive act taken by executives within a company to intentionally conceal financial information about the company and to deceive others about the wealth of the company

In my opinion, I do not see any boundaries between earnings management and fraudulent reporting. Both actions will prevent investors or creditors, who usually rely on the company’s financial information in making decision, from receiving consistent and reliable results. Implementing either earning management or fraudulent reporting would give the same misleading information regarding the company’s earnings.

Reasons of Fraudulent Actions Were Not Detected Earlier

The fraudulent actions taken by WorldCom managers were not detected earlier because of WorldCom’s company structure and distant relations with both WorldCom’s external auditor and the board of directors. First, WorldCom’s departments were spread out across the country, which made it difficult for the different departments to fully coordinate and realize what was occurring in other departments.

Second, the company encouraged a corporate culture that “employees should not question their superiors, but simply do what they were told.” Thus, lower level employees were not able to express their concerns about company policies or behaviors. Those employees had incentives to follow top management’s demand in order to avoid personal criticisms or threats that were commonplace to employees who did not obey orders....