By 2001 the telecommunications
market was softening; meaning prices were falling due to an excess of supply
and a decrease in demand. The market was
being flooded with telecommunication companies and therefore the prices were
lessening due to a lack of buyers.
WorldCom had already signed contracts with third party telecommunication
companies promising to complete their calls.
These multi billion dollar contracts were actually costing more in
expenses than what the company would or was receiving in revenue. (Sandberg,
Solomon, & Blumenstein, 2002) Ebber’s
personal financial troubles needed WorldCom to flourish since his only means to
pay his debt was through his stock in his own company.
To fix this issue; Sullivan and
Ebbers concocted some more than questionable accounting practices. Thus began the practice of taking an
operating expense and reclassifying the expense as a capital expenditure. This would make the company appear to be in
good standing and match the stock prices.
Internal and external auditors were not being allowed access to these
accounting entries yet they just kept signing off on the audits. Cynthia Cooper stumbled across an incorrect
entry while auditing. She found one
entry where the account was an expense but was entered as a capital expenditure. She did not take no for an answer; she began
her own secret audit and made the audit committee aware of her astonishing
findings. (Stefano, 2005)
Sandberg, J., Solomon, D., & Blumenstein, R.
(2002, June 27). Accounting Spot-Check Unearthed A Scandal in WorldCom's
Books. Retrieved from The Wall Street Journal: http://online.wsj.com/article/SB102512901721030520.html
Stefano, T. F. (2005, August 18). WorldCom's
Failure: Why Did It Happen? Retrieved from E-Commerce Times:
http://www.ecommercetimes.com/story/45542.html
Very helpful read.
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