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Accounting Fraud at Worldcom

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1. What are the pressures that lead executives and managers to "cook the books?"
They had developed a reputation of being a company with a large revenue stream that would be able to match for the expenses that the company was generating. They had set a bench mark of 42% E/R Ratio, that was not able to be sustained because of the slowing economy and additional competition from competitors. They believed that the company would not survive unless they changed the books numbers to look profitable because of a comment made by Ebbers. “Ebbers made a personal, emotional speech to senior staff about how he and other directors would lose everything if the company did not improve its performance.” p 4.
2. What is the boundary between earnings smoothing or earnings management and fraudulent reporting?
To me there comes a line where you know that the entry that you are making is incorrect, and you make the entry anyways. That to me is where fraud is committed. Otherwise make your best judgement call on what would be appropriate to capitalize, or develop a new way of calculating estimates for accruals if you believe them to be wrong.
3. Why were the actions taken by WorldCom managers not detected earlier?
There was no set of stated policies written in the company. The company most likely had around 30,000 employees in 1995, but didn’t have an employee code of conduct. Since this was not in place, every manager was able to act on their own accord. The accounting department sounded like a war room, where each group had to deceive the other of journal entries. The external auditor was stone walled during the audit, and simply stated the information was a moderate risk. The senior management team used scare tactics or “it’ll only be one time” tactic to coheres employees to making fraudulent entries. The internal auditors were never allowed to do their job. They couldn’t get…...

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