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David Whitehead was the founder and CEO of the phone company WorldCom. The company engaged in a series of increasingly large, debt-financed acquisitions of other
David Whitehead was the founder and CEO of the phone company WorldCom. The
company engaged in a series of increasingly large, debt-financed acquisitions of
other companies. These acquisitions made the company grow quickly, which made
the stock price increase dramatically. However, because the acquired companies all
had different accounting systems, WorldComs financial records were a mess. When WorldComs performance started to flatten out, David coerced WorldComs accountants to engage in a number of fraudulent activities to make net income look better than it really was and thus prop up the stock price. One of these frauds involved treating K7 billion of line costs as capital expenditures. The line costs, which were rental fees paid to other phone companies to use their phone lines, had always been properly expensed in previous years. Capitalization delayed expense recognition to future periods and thus boosted current-period profits.
Required
(a) Identify and explain the missing controls in WorldCom
(b) Explain what led to the collapse of WorldCom.
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