(a) WorldCom was a major global communications provider based at Clinton Mississippi, but operated in more than 65 countries. WorldCom engaged in schemes directed and approved by its senior management. The company disguised its true operating performance by using undisclosed and improper accounting that materially overstated its income before income taxes and minority interests by approximately $3.055 billion in 2001 and $797 million during the first quarter of 2002.
(b) The company also improperly transferred certain costs to its capital accounts; thereby WorldCom’s transfer of its costs to its capital accounts violated the established standards of generally accepted accounting principles (GAAP). As a result, WorldCom falsely portrayed itself as a profitable business during 2001 and the first quarter of 2002. WorldCom’s improper transfer of certain costs to its capital accounts was not disclosed to investors in a timely fashion, and misled investors about WorldCom’s reported earnings.
(c) Conduct an internet search or from the university library to locate article(s) relating to how WorldCom used restructuring reserves (liabilities) to fraudulently manipulate reported earnings.
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1) Identify and discuss how the management of WorldCom was able to perpetrate the fraud in (a) and (b) scenarios.
2) In relation to fraud elements, discuss what you can identify to be the primary factors or causes of the fraud?
3) What are the audit procedures that should have helped to identify scenario (b) and (c).