Worldcom

STUDY QUESTIONS

1. What are the pressures that lead executives and managers to “cook the books?”

The executives of WorldCom got tremendous pressure to “cook the books”. They receive pressure from their stockholder as the company need to grow in a constant basis otherwise the management have to be replaced. Company growth determines the executive’s year-end bonus so the “greed” blinded them from doing the right thing. WorldCom executives receive pressure from their top direct management and the CEO. Finally, other businesses growth was decelerating and they wanted to view their company as a “unique case”. No matter what the industry is suffering, WorldCom will always grow.

2. What is the boundary between earnings smoothing or earnings management and fraudulent reporting?

There is a difference between earning smoothing and fraudulent reporting. The first is considered legal and the later is definitely illegal act. Earning management is used to affect the reported figures by implementing various accounting standards like double decline depreciation (expense side). Companies use these techniques to smooth their profits and make it stable throughout specific time period.

On the other hand, fraudulent reporting is a criminal act punished by law. It is used to hide the true figures from various stakeholders. Executives try to show another picture of the company performance to achieve their personal goals of better compensation. However, both strategies try to “manipulate” financial statements figures and thus would prevent various stake holders from seeing the true picture of the company performance and this will lead to catastrophic endings as the case with WorldCom.

3. Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the type of actions that occurred in WorldCom?

These violations were not detected earlier due to the...