The WorldCom Scandal

Paper Summary:

This paper explains that, compared to the sophisticated accounting techniques adopted by Enron to hide its real financial health, the "modus operandi" of the 'crooks' at WorldCom was relatively simple, involving the improper capitalization of expenses by re-characterizing certain operating expenses as capital assets, and the improper release of reserves held against operating expenses. The author points out that personal greed stands out as the single biggest reason for this crime. The paper relates that the continuing manipulation of WorldCom's financial statements remained undetected from as far back as 1999 to mid-2002 due to the failure of the system because the auditors, the "moral watchdogs," were largely unregulated, and the accounting profession had followed a long-held tradition of self-regulation.

Table of Contents
Facts
Background
How Was the Fraud Perpetrated?
Why Was the Fraud Committed?
Preventing and Detecting Fraud
Why the Fraud Remained Undetected at WorldCom?
Measures Needed to Prevent or Detect Fraud
Comments and Conclusion

From the Paper:

"In the 1990s, WorldCom entered into a number of long-term lease agreements with various third party telecommunication companies in order to gain access to their networks. According to the terms of the agreements, WorldCom was obliged to pay a fixed amount to the carriers, regardless of how much of the leased capacity was actually utilized by WorldCom. These lease payments were named "line costs" and as per the prevailing accounting principles should have been treated as "operating expenses" in the income statements of the company. By 2000, the optimistic growth projections in the telecomm sector had failed to materialize, and WorldCom's incomes could not keep pace with its rising expenses. If the company's declining income had become public at that stage, its share price that had reached a peak of $64 in 1999 would have fallen drastically."

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