Briefly summarize the WorldCom scandal

WorldCom
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Scandals in the cooperate sector have taken place from time to time some of which are discovered as soon as they start whereas others take time before they come to light. These fraudulent activities have negative effects in the product market like reduction in value of share. (Johns 2010)
The telecommunication fraud is a major scandal that will always be talked about for a long time. The following is a case study on the fraudulent activities behind the doors of WorldCom, the second largest telecommunication firm in the USA. Questions on why, how, where and who was involved in this scandal always cross the minds of business and common people at large. The top management of WorldCom initiated and fuelled the scandal. It was headed by Bernard Ebbers, the CEO, Scott Sullivan , the Chief Financial Officer, and David Myers, the Comptroller.
After the economic boom, WorldCom was affected by the economic meltdown across the globe and could not generate the sales they had projected. Customer demand declined hence WorldCom could not sell its surplus telecom products. They had to pay a third party distributors for long distance telecom lines that were not utilized properly as they should be. Furthermore, the high cost of line capacity plus the declining customer demand decreased the net revenue. (Jeter 2003). Pressure had also mounted for them to generate more revenue and increase profit levels. This was what was perceived to have led to the scandal.
There was a lot of inconsistency in WorldCom`s books of accounts. The accountants did not expense the cost of the balance sheet but rather capitalized it. This was a tremendous mistake as it led to the falsifying of line costs. It therefore, leads to the notion that expenditure was low and hence incorrect valuation of their assets. The fraud was also accomplished through inflating revenues with falsified accounting entries. These were unallocated accounts of the corporation. The inflation was high to a tune of 11 billion dollars. The fraudulent activities were discovered by a group of internal auditors who had previous suspicions on the validity of the asset base of WorldCom. The subsequent discovery of the fraud led to a massive drop on the shares of WorldCom in the market. There were massive losses to the share holders and the company plunged into a huge debt crisis forcing to it file for chapter 11 bankruptcy protection. (Khan 2006)
The capitalized assets at WorldCom were not really assets but expenses incurred on purchasing products, they were not going to generate any future income or didn`t have any lasting value. The items WorldCom took were operating expenses but the pretense that they were capital expenses was on the attempt to convince investors and lenders that the company was making a profit when it was actually not.
WorldCom`s accounting department escaped discovery by Arthur Andersen, its auditing firm by covering up on their losses and pretending to purchase items of lasting value when they losing billions of dollars through massive cost and expenditure. The auditing firm should have used a substantive audit procedure to determine if WorldCom`s financial statements were misstated through capitalizing expenses. Trials should have been performed using a set of specified information from the books of accounts. All the financial statements from the accounting system are supposed to be checked and verified of any fault. The auditor was supposed to check the details on all the capitalized assets to obtain audit evidence regarding the value of the capitalized assets. Also, he was supposed to check the time and the rates in which expenses are charged. Basically, capitalized expenses should be charged once in a year and not on a monthly basis. Moreover, the auditor was to ensure that the capitalized expenses appeared once in that financial year. The basic process of performing this procedure is by first examining the policies of the company...