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Friday, June 28 | ||||
Improper Accounting: WorldCom
(WorldCom (WCOM))
Let's take a look at the WorldCom accounting scandal... it's simpler to understand than Enron's fraud. One of the company's biggest operating expenses is "line costs," which are the fees that WorldCom pays third party telecommunication network providers for the right to access the third parties' networks. Apparently billions of dollars of these expenses got shifted to numerous capital accounts at the end of each of the last five quarters. By keeping these expenses off the income statement, WCOM was able to boost net income, materially overstating the company's profits. How several billion dollars of shifted expenses escaped the attention of both the internal and external auditors (alas, yes, Arthur Andersen) is a mystery. WorldCom management undoubtedly worked hard to conceal the fraud, so I'm not sure how much blame lies with the auditors. (Whereas in the Enron case, it appears that the independent auditor was in cahoots with a corrupt management.) The damage caused by all this fraudulent accounting (Adelphia, Enron, Global Crossing, Qwest, and WorldCom) is horrific, but at least it stimulates the normally dull lives of accounting students! |
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