Accounting deals with internal and external users. External users are the investors, customers, suppliers, employees, authorities, and creditors that use the information about the firm to make decisions regarding their future relationship with that firm. The information that they look at to make these decisions are the financial statements. Each of these external users may use the financial statements differently. An investor may look to see if it is worth investing in that specific company; while a supplier may look to see if they should do business with that specific company. The internal users of that firm prepare and report the financial statements that the external users use to make their decisions. The single most important thing that firms show on their financial statement is earnings. Earnings are the amount of profit that a firm or company makes during a period. The value of a company and its earnings go hand in hand. Higher earnings means increased value for the company and lower earnings mean a decreased value for the company. Also, if companies have continuous growth in earnings then that would result in higher stock prices. Investors will look at the earnings of a company to decide which particular stock that they would want to invest in. Since earnings are the most important thing that companies show on their financial statements, many companies undertake earnings management. Earnings management refers to the strategy that companies use to manipulate their earnings so that they can change their reported earnings on the financial statements (Investopedia). It is very hard for companies to continuously report consistent periodic earnings because of economic cycles and seasonal changes. Since it is hard t...
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...as declining, WorldCom showed false growth and profitability so that they could increase the price of their stock. They were able to do this in two different ways. First of all, they underreported line costs. Line costs are the interconnection expenses with other telecommunication companies. Secondly, WorldCom was able to increase their revenue by creating fake accounting entries. These accounting entries were corporate unallocated revenue accounts. After the internal audit department at WorldCom found some of the fraud that was being committed, the Securities and Exchange Commission launched an investigation soon after. It was soon estimated that WorldCom’s assets were inflated by 11 billion. (WorldCom scandal) The CEO Bernard Ebbers ended up getting convicted of fraud and was sentenced to 25 years in prison, while WorldCom ended up filing for bankruptcy.
While Enron was the complicated fraud, WorldCom fraud was the simplest one to commit. WorldCom which is now known as MCI and acquired by Verizon Communication since 2006 was founded in 1983 to create a discount long-distance provider. The company grew very rapidly in the 1990s because of several large acquisitions (Beresford, Katzenbach, & C.B. Rogers, 2003) WorldCom completed 3 mergers in 1998 and one of the merger was the acquisition of MCI Communications Inc for $40 billion, the largest merger at that time. WorldCom also merged with Brooks Fiber Properties Inc for $1.2 billion and CompuServe Corp for $1.3 billion (The rise and fall of WorldCom, 2008). WorldCom announced the merger with Sprint Corp. in 1999 and its shares’ price went up for more than $64 but, the merge was blocked by regulators in both the U.S. and Europe because they concerned that it would create a monopoly in 2002 (The rise and fall of WorldCom,
Financial statement users around the globe use financial statements to evaluate the performance of companies (Fundamentals of Financial Accounting, 2006). In order to locate a company’s reported assets, liabilities, expenses and revenues, statement users rely on four types of financial statements. The four financial statements include: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows (Fundamentals of Financial Accounting, 2006, p. 6). Each of these reports provides different information to the financial statement user. The Balance Sheet reports at a point in time: a company’s assets (what it owns), liabilities (what it owes) and stockholder’s equity (what is left over for the owners) (Fundamentals of Financial Accounting, 2006, p.7). The Income Statement shows whether a business made a profit (net income) during a specific period of time (Fundamentals of Financial Accounting, 2006, p. 10). The Statement of Retained Earnings illustrates what portions of the company’s earnings was paid to stockholders and retained by the company for future operations (Fundamentals of Financial Accounting, 2006, p.12). Finally, the Statement of Cash Flows reports summarizes how a business’ “operating, investing, and financial activities caused its cash balance to change over a particular range of time” (Fundamentals of Financial Accounting, 2006, p.13).
Financial accounting focuses on providing financial statements to stockholders and internal and external users. Financial statements created under managerial accounting provide instructions and data used for internal business management purposes in effort to compute cost of product. Financial accounting provides data for the sole purpose of preparing companies financial statements. Unlike financial accounting, managerial accounting uses past records to forecast future budgets; additionally it doesn’t adhere to any set financial accounting standards such as US GAAP or IFRS (Averkamp). Financial accounting creates financial income statements, balance sheets and cash flow statements under the guidelines of US GAAP or IFRS; however managerial accounting prepares in-depth management products to include cost volume profit analysis, profit planning, operational budgeting, capital budgeting to name a few
Romero, S., & Berenson, A. (2002, June 26). WorldCom says it hid expenses, inflating cash flow from $3.8 billion. The New York Times. Retrieved from http://www.nytimes.com
In modern day business, there can be so many pressures that can cause managers to commit fraud, even though it often starts as just a little bit at first, but will spiral out of control with time. In the case of WorldCom, there were several pressures that led executives and managers to “cook the books.” Much of WorldCom’s initial growth and success was due to acquisitions. Over time, WorldCom discovered that there were no more opportunities for growth through acquisitions when the U.S. Department of Justice disallowed the acquisition of Sprint.
Before 2002, WorldCom was one of the top telecommunication businesses in its industry because of many acquisitions obtained by the company. Due to the increased popularity of the internet and the acquirement of UUNet and MCI Communications, WorldCom share significantly increased. According to Moberg and Romar (as cited in Browning, 1997) "By 1997, WorldCom's stocks had risen from pennies per share to over $60 a share." WorldCom had become an attractive investment on Wall Street. However, the continual attainment of these business transactions created an overwhelming situation for WorldCom management (Moberg and Romar, 2003). The management at WorldCom poorly planned the financial integration of the additional companies which eventually led to the bankruptcy of the successful corporation.
In (Complaint 17588)we find that they were directly involved in a fraudulent improper accounting scheme. With the intent to manipulate said earnings to keep them on point with Wall Street's expectations as well as support WorldCom's stock price.
According to Ashraf (2011), during the 1990s, WorldCom was motivated by the low interest rates and frequently rising stock prices. WorldCom strived to achieve the high-growth strategies that relied on aggressive corporate actions, which involved a creative accounting practices.
WorldCom started out as Long Distance Discount Services (LDDS) a long distance telephone service provider from Mississippi 1983. Bernard Ebbers was selected as their CEO and with his help; WorldCom was placed as number 52 on the Fortune 500 Companies in 2001.( ) The company’s success came from their ability to provide an alternative to the major long distance carriers by tailoring service to each customers calling patterns. Through acquisitions of multiple companies allowed LDDS to grow at a very rapid rate. The fraud began in the late 1990’s; the company's revenue stream had slowed so the stock price of the company was falling. The company took 2.8 billion out of reserve that was meant to cover liabilities in some of the companies it had acquired, and then put that money into its revenue line in the financial statements.( ) By 1998, their stock was slowly declining. During 2001, Ebbers persuaded the board of directors to provide him corporate loans. Ebbers wanted to cover the margin, but the strategy ...
Income statements also show Earnings Per Share (EPS). EPS shows how much money shareholders would receive if all of the net earnings for the period were distributed. (A highly unlikely occurrence; they’re usually reinvested.)
Transparency and full-disclosure were non-existent to both employees and investors. Employees were told to “spend whatever was necessary to bring revenue in the door, even if it meant that the long term cost…outweighed short-term gains” (Kaplan et al., 2007, p. 4) which created a costly underutilized network backbone. Checks and balances were ever established to ensure that money was being invested in the best interest of the company and its shareholders. As time went on these decisions would result in complete failures on all levels and would assist in creating scandal worth millions of dollars. At one time WorldCom stock was calculated to “once be worth $180 billion”...
Accounting is the pillar of every company to measure its growth, loss, revenue , capital, its really specify the real terms in foam of figures and sometimes in tables, in accounting there are certain rules are obtained to make more accuracy while playing with figures.
...ent expense the year it incurred. Due to the reporting error, in 2001 $3.055 billion was misclassified and 4791 million in the first quarter of 2002 (Law Maryland). In order to avoid getting caught, WorldCom was trying to be slick by leaving some line costs as current expense so that the error in classifying would not be easily detectible. This error in classifying expenses cause WorldCom to increase net income and assets. This fraud was found by the companies internal audit, Cynthia cooper, on May 2002. This detection was not good news to Arthur Anderson as they were the outside auditors of WorldCom. Anderson had already been affected by Enron scandal and neglecting to do to their job correctly. But with WorldCom they claimed that the chief financial officer Scott Sullivan did not tell them about the line costs being capitalized and they were unaware of this fact.
Financial and Managerial accounting are used for making sound financial decisions about an organization. They provide information of past quantitative financial activities and are useful in making future economic decisions. (Albrecht, Stice, Stice, & Skousen, 2002) The same financial data is used to derive reports for each accounting process yet they differ in some ways. Financial accounting primarily provides external reports for external users such as stock holders, creditors, regulating authority and others. (Garrison, Noreen, & Brewer, 2010) On the other hand Managerial accounting is concern with providing information that deals with the internal viability of the organization and is tailored to meet the needs of an individual organization. (Albrecht, Stice, Stice, & Skousen, 2002)
WorldCom began as a small provider of long distance telephone service. During the 1990s, the firm made a series of acquisitions of other telecommunications firms that boosted its reported revenues from $154 million in 1990 to $39.2 billion in 2001 (Lyke and Jickling, 2002).