Question

Please help answering these questions

1.

a.One of the ways that WorldCom misstated their earnings as part of this fraud was through the reversal of previously recorded accruals for expected future line costs.Using generic, yet descriptive, account titles, provide the journal entry that WorldCom would have recorded to reverse these accruals.In parentheses, after the account name, please identify the financial statement category (A, L, SE, R, or E) to which each account belongs.You may ignore the dollar amount component of the journal entry.For this particular question you may also ignore the "complete sentences" rule and depict your answer in journal entry format.

Dr. Accrual Line Cost ExpenseXXX (L)

Cr. Line Cost ExpenseXXX (A)

b.Assuming the bills received for actual line costs were of a dollar value that was larger than the amount remaining (assume something still remains) in the previously recorded accrual for future line costs (after the inappropriate reversals were recorded), provide the journal entry that WorldCom would have recorded at the time of payment of those bills (once again using generic, yet descriptive, account titles).In parentheses, after the account name, please identify the financial statement category (A, L, SE, R, or E) to which each account belongs. You may ignore the dollar amount component of the journal entry.For this particular question you may also ignore the "complete sentences" rule and depict your answer in journal entry format.

c.What basic, fundamental principle of accounting was MOST LIKELY violated by WorldCom through their process of reversing previously recorded accruals for expected future line costs?Please provide a written description of exactly which stage/component of the process could have caused the violation to occur.

2.

a.One of the other significant ways that WorldCom misstated their earnings as part of this fraud was through the capitalization of excess network capacity.Provide the journal entry that WorldCom would have recorded to capitalize this excess network capacity.In parentheses, after the account name, please identify the financial statement category (A, L, SE, R, or E) to which each account belongs. You may ignore the dollar amount component of the journal entry.For this particular question you may also ignore the "complete sentences" rule and depict your answer in journal entry format.

b.Using generic, yet descriptive, account titles provide the journal entry that WorldCom should have recorded to appropriately account for this excess network capacity.In parentheses, after the account name, please identify the financial statement category (A, L, SE, R, or E) to which each account belongs.

c.Describe the financial statement impact the capitalization of excess network capacity had on WorldCom's records in contrast to how they would have been impacted had the excess capacity been accounted for appropriately.

3.Citing specific examples from the case describe the nature of the control environment at WorldCom during the time period over which the fraud was perpetrated.

4.Citing specific examples from the case, what were the most likely reasons why Bernie Ebbers and Scott Sullivan intentionally "cooked the books"?Please take into consideration the pressures and incentives that may have been involved, as well as the nature of the growth strategy employed by WorldCom and how that strategy may have been impacted had the actual results of operations been released to the public, rather than the more optimistic, fraudulent results.

5.What punishments(s), if any, did Arthur Andersen receive for its role in the WorldCom fraud?What was (were) the underlying reason(s) for what did or didn't befall Arthur Andersen as part of their role in the WorldCom fraud?

6.

a.There were several "red flags" that indicated a fraud was taking place at WorldCom.Please describe the "red flags" that should have been evident to the WorldCom audit team from Arthur Andersen.

b.What conditions, specific to Arthur Andersen's audit strategies and approach, and attitude towards WorldCom, contributed to Arthur Andersen's inability to discover this fraud.

7.Citing specific examples from each case discuss the similarities between the WorldCom and Diamond Foods frauds (focusing on control environment, circumstances behind what may have prompted each entity to undertake the fraud, any red flags that may have existed, etc.).

8.What specific conditions existed for Betty Vinson that caused her to ultimately decide against resigning, even though she initially turned in her notice?Was she a victim or a villain?Support your answer.

9.What role, or lack thereof, did the Board of Directors play in this fraud?What were the conditions that existed, related to the Board of Directors, which caused them not to uncover this fraud?

Accounting Fraud at WorldCom WorldCom could not have failed as a result of the actions of a limited number of individuals. Rather, there was a broad breakdown of the system of internal controls, corporate governance and individual responsibility, all of which worked together to create a culture in which few persons took responsibility until it was too late. -Richard Thornburgh, former U.S. attorney general On July 21, 2002, WorldCom Group, a telecommunications company with more than $30 billion in revenues, $104 billion in assets, and 60,000 employees, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Between 1999 and 2002, WorldCom had overstated its pre- tax income by at least $7 billion, a deliberate miscalculation that was, at the time, the largest in history. The company subsequently wrote down about $82 billion (more than 75%) of its reported assets. WorldCom's stock, once valued at $180 billion, became nearly worthless. Seventeen thousand employees lost their jobs; many left the company with worthless retirement accounts. The company's bankruptcy also jeopardized service to WorldCom's 20 million retail customers and on government contracts affecting 80 million Social Security beneficiaries, air traffic control for the Federal Aviation Association, network management for the Department of Defense, and long-distance services for both houses of Congress and the General Accounting Office. Background WorldCom's origins can be traced to the 1983 breakup of AT&T. Small, regional companies could now gain access to AT&T's long-distance phone lines at deeply discounted rates. LDDS (an acronym for Long Distance Discount Services) began operations in 1984, offering services to local retail and commercial customers in southern states where well-established long-distance companies, such as MCI and Sprint, had little presence. LDDS, like other of these small regional companies, paid to use or lease facilities belonging to third parties. For example, a call from an LDDS customer in New Orleans to Dallas might initiate on a local phone company's line, flow to LDDS's leased network, and then transfer to a Dallas local phone company to be completed. LDDS paid both the\fEpilogue Arthur Andersen was never held to account for its WorldCom audits. On June 13, 2002, after a six- week trial and 10 days of deliberations, jurors convicted Arthur Andersen for obstructing justice for its destruction of Enron documents while on notice of a federal investigation. After the verdict, the Securities and Exchange Commission announced that the accounting firm would cease practicing before the commission by August 31, 2002. On August 28, 2002, David Myers pleaded guilty to three felony charges: securities fraud, conspiracy to commit fraud, and making false filings with the Securities and Exchange Commission. In October 2002, Yates, Vinson, and Normand each pleaded guilty to one count of securities fraud and one count of conspiracy to commit securities fraud, charges that carried a maximum sentence of 15 years in prison. Vinson was released on a bond secured by $25,000 of equity in her home. She was now working as an accountant for a large Kentucky Fried Chicken franchise.26 On March 2, 2004, Sullivan pleaded guilty to federal fraud and conspiracy charges that he deceived the public, the SEC, securities analysts, and others about WorldCom's true financial condition. He admitted: "I took these actions, knowing they were wrong, in a misguided effort to preserve the company to allow it to withstand what I believed were temporary financial difficulties. ... I deeply regret my actions and sincerely apologize for the harm they have caused." Sullivan agreed to use the proceeds from the sale of his Florida home, on the market for $13 million, for restitution to WorldCom investors and to cooperate with the government in its case against Ebbers. Also on March 2, 2004, the U.S. Justice Department indicted Bernie Ebbers, who was then teaching Sunday school in Jackson, Mississippi. Ebbers asserted his innocence to the government's fraud and conspiracy charges. On March 15, 2005, after a six week trial, during which Ebbers argued that he was a salesman not a numbers man, the jury found him guilty of fraud, conspiracy, and filing false documents with regulators. He was subsequently sentenced to 25 years in prison. On August 5, 2005 Betty Vinson was sentenced to 5 months in prison, and 5 months of home detention, terms that she has now completed serving. David Myers and Buford Yates received jail sentences of a year and a day. Troy Norman did not receive a prison sentence because of his attempts to leave the company rather than commit accounting fraud. Scott Sullivan was sentenced to five years in prison. His sentence had been set at 80% less time than Ebbers because of his cooperation with the prosecution. Cynthia Cooper remained as WorldCom's senior Internal Audit executive until July 2004. She was not promoted at WorldCom (subsequently MCI), and no senior company executive ever personally thanked her. Several employees resented Cooper, believing that her revelation of accounting irregularities had led to WorldCom's bankruptcy. In December 2002, Time magazine named her as one of its "Persons of the Year." In 2004, the AICPA Hall of Fame inducted her as its first woman member. In 2004, Cooper left WorldCom to become a consultant and speaker on ethical and moral leadership.28 Bernie Ebbers entered prison on September 27, 2006. He must serve at least 85% of his term.Exhibit 1 A Sample of WorldCom Mergers and Acquisitions, 1991-2001, with Acquisition Price for the Major Transactions 1991 -> Mid-American Communications Corporation > AmeriCall FirstPhone Advanced Telecommunications Corporation-Acquired for stock value of $850 million. * World Communications, Inc. > Dial-Net, Inc. > TRT Communications, Inc. 1993- Metromedia Communications Corporation and Resurgens Communications Group, Inc- Acquired for $1.25 billion in stock and cash. 1994- IDB Communications Group 1995- Williams Telecommunications Group, Inc. (WilTel)-Acquired for $2.5 billion. 1996-> MFS Communications Company, Inc.-Acquired for $12.4 billion. >TCL Telecom 1997- * BLT Technologies, Inc. > NLnet 1998- Brooks Fiber Properties, Inc.-Acquired for $2.0 bilion. >CompuServe Corporation and ANS Communications, Inc.- The WorldCom merger with CompuServe was valued at approximately $1.4 billion. > MCI-Acquired for $40.0 billion. 1989 - > ActiveNet * CAI Wireless Systems, Inc. SkyTel 2001- Intermedia Communications, Inc. (thereby gaining control of Digex, a leading provider of managed Web and application hosting services)-Acquired for approximately $6 billion ($3 billion in equity and $3 billion in debt and preferred stock ).Clifford L. Alexander Jr., 67, joined the board after the merger with MCI in 1998. He was previously a member of the MCI Board. James C. Allen, 54, became a director in 1998 through the acquisition of Brooks Fiber Properties where he served as the vice chairman and CEO since 1983. Judith Areen, 56, joined the board after the merger with MCI in 1998. She had previously been a member of the MCI Board. Areen was appointed executive vice president for Law Center Affairs and dean of the Law Center at Georgetown University in 1989. Carl J. Aycock, 52, was an initial investor in LDDS and a director since 1983. He served as secretary of WorldCom from 1987 until 1995. Ronald R. Beaumont, 52, was COO of WorldCom beginning in 2000 and had previously served both as the president and CEO of WorldCom's operations and technology unit and as the president of WorldCom Network Services, a subsidiary of WorldCom, Inc. Prior to 1996, Beaumont was president and CEO of a subsidiary of MFS Communications. Max E. Bobbitt, 56, became a director in 1992 and served as chairman of the Audit Committee. He was president and CEO of Metromedia China Corporation from 1996 to 1997 and president and CEO of Asian American Telecommunications Corporation, which was acquired by Metromedia China Corporation in 1997. Bernard J. Ebbers, 59, was the CEO of WorldCom since 1985 and a board member since 1983. Francesco Galesi, 70, became a director in 1992. He was the chairman and CEO of the Galesi Group of companies, involved in telecommunications and oil and gas exploration and production. Stiles A. Kellett Jr., 57, became a director in 1981 and served as chairman of the compensation and stock option committee. Gordon S. Macklin, 72, became a director in 1998 after having served as chairman of White River Corporation, an information services company. He sat on several other boards and had formerly been chairman of Hambrecht and Quist Group and the president of the National Association of Securities Dealers, Inc. Bert C. Roberts Jr., 58, was the CEO of MCI from 1991 to 1996 and served as chairman of the MCI Board beginning in 1992. He stayed on in this capacity after the WorldCom merger with MCI in 1998. John W. Sidgmore, 50, was the vice chairman of the board and a director at WorldCom beginning in 1996. From 1996 until the MCI merger, he served as COO of WorldCom. He had previously been president and COO of MFS Communications Company, Inc. and an officer of UUNET Technologies, Inc. Scott D. Sullivan, 39, became a director in 1996 after he was named CFO, treasurer, and secretary in 1994.\fThroughout 1999 and EDGE], Sullivan told staff to release accruals that he ciaimed were Inc high relative to future cash payments. Sullivan apparently told several business ruiit managers that the Mill merger had created a substantial amount of such overaccruals. Sullivan directed David Myers [embolleri to deal with any resistance from senior managers to the accrual releases. In one instance, Myers asked David Sclmeeman, acting CFO of UUNET, to release line accruals for his business unit. When Schneeman asked for an explanation, Myers responded: "No, you need to book the entry." When Sctuteeman refused, Myers told him in another email, \"I guess the only way 1 am going to get this booked is to y to 11C. and book it myself. Book it right now, lean't wait anotirer minute."i Schneeman still refused. Ultimately, staff in the general accounting department made Myers's desired changes to the general ledger. {See Exhibit 2 for a partial organizational chart} In another instance' Myers asked Timothy Schnebergcr, director of intemelr'onal fixed costs, to release $35M million in accruals \"Here's your number,\" Myers reportedly told Schneberger, asking him to book the $35-11 million adjustment. Yates, director of General Accounting, told Seimeberger the risquest was from "the Lord Emperor, God himself, Scott [..""hrllivan]."I When Soluteberger refused to make the entry and also refused to provide the account number to enable Myers to make the entry, Betty Vinson, a senior manager in General Accounting, obtained the account number from a low level analyst in Sclmeberger' s group and had one of her subordinatm ruake the entry.\" Employees in the general accounting department also made acmral releases from some departments without DDI'IEultir'tg the sleptartrtt'trstttsl senior management. In 2111], General nominating released $231 rrtilliDn against line costs front accruals in the tax department's accounts, an entry that the tax group did not learn about tmtil Ell-Ill. Over a sevenquarter period betiveen 1999 and EDEN], WorldCom released $3.3 billion worth of accruals, most at the direct request of Sullivan or Myers Several business units were left with accruals for future cash payments that were well below the actual amounts they would have to pay when bills arrived in the next period. Expense Capitalization By the rst quarter of 21:01, so few accruals were left to release that this tactic was no longer available to achieve the targeted EIR ratio.1 Revenues, however, continued to decline, and Sullivan, through his lieutenants Myers and Yates, urged senior managers to maintain the 42% EIR ratio. Senior staff described this target as \"wildly optimistic,\" "pure fantasy,\" and "bnpoasible." One senior executive described the pressure as \"unbearablegreater than be had ever experienced in his fourteen years with the company."m Sullivan devised a creative solution. He had his staff identify the costs of excess network capacity. He reasoned that these costs could be treated as a capital expenditure, rather titan as an operating cost, since the contracted excites capacity gave the company an opportunity to enter the market quickly at some future time when demand was stronger than current levels. on accounting manager in 20011] had raised this possibility of beating periodic line costs as a capital expenditure but had been rebuffed by Yates: "David [Myers] and l have reviewed and discussed your logic of capitalizing excess capacity and can find no support within the current accounting guidelines that would allow for this accounting treatment; "'"