The case study:

Hit the numbers:

Even as conditions in the telecommunications industry deteriorated in 2000 and 2001, WorldCom continued to post impressive revenue numbers. In April 2000 CEO Ebbers told analysts that he "remain[ed] comfortable with . . . 13.5 to 15.5 percent revenue growth in 2000." In February 200L Ebbers again expressed confidence that WorldCom Group could repeat that performance: "On the WorldCom side of the business, we are sticking with our 12 percent to 15 percent revenue growth guidance for 2001. Let me restate that. On the WorldCom side of the business/ we are sticking with our 12 percent to 15 percent revenue growth guidance for 2001

Monitoring of revenue at Worldcom

According to several accounts, revenue growth was emphasized within WorldCom; in fact, no single measure of performance received greater scrutiny. On a regular basis, the sales groups' performances were measured against the rer,- enue plan. At meetings held every two to three months, each sales chanlel manager was required to present and defend his or her sales channel's performance against the budgeted performance. Compensation and bonus packages for several members of senior management were also tied to double-digit revenue growth. In 2000 and 2001, for instance, three executives were eligible to receive an executive bonus only if the company achieved double-digit revenue growth over the first six months of each year.2

Monthly Revenue Report ancl the Corporate I]nallocated Schedule

The principal tool by which revenue performance was measured and monitored at WorldCom was the monthly revenue report ("MonRev"), prepared and distributed by the revenue reporting and accounting group (hereafter referred to as the revenue accounting group). The MonRev included dozens of spreadsheets detailing revenue data from all of the company's channels and segments. The full MonRev contained the Corporate Unallocated schedule, an attachment detailing adjustments made at the corporate level and generally not derived from the operating activities of WorldCom's sales channels. WorldCom's Chief Financial Officer and Treasurer Scott Sullivan had ultimate responsibility for the items booked on the Corporate Unallocated schedule.3 In addition to CEO Ebbers and CFO Sullivan, only a handful of employees outside the revenue accounting group regularly received the full MonRev. Most managers at WorldCom received only the portions of the MonRev that were deemed relevant to their positions. Sullivan routinely reviewed the distribution list for the full MonRev to make sure he approved of everyone on the list.a The total amounts reported in the Corporate Unallocated schedule usually spiked during quarter-ending months, with the largest spikes occurring in those quarters when operational revenue lagged farthest behind quarterly revenue targets-the second and third quarters of 2000 and the second, third, and fourth quarters of 2001. Without the revenue that was recorded in the Corporate Unallocated account, WorldCom would have failed to achieve the doubledigit growth it reported in 6 out of 12 quarters between 1,999 and 2OO7.

Process of Closing and Consolidating Revenues

WorldCom maintained a fairly automated process for closing and consolidating operational revenue numbers. By the 10th day after the end of the month, the revenue accounting group prepared a draft "preliminary" MonRev that was followedby a final MonRev which took into account any adjustments that needed to be made. kr non-quarter-ending months, the final MonRev was usually similar, if not identical, to the preliminary MonRev.6 In quarter-ending months, however, top-side adjusting joumal entries, often very large, were allegedly made during the quarterly closing process in order to hit revenue growth targets. Investigators later found notes made by senior executives :-r:.1999 and 2000 that calculated the difference between "act[ual]" or "MonRev" results and "target" or "need[ed]" numbers, and identified the entries that were necessary to make up that difference. CFO Scott Sullivan directed this process, which was allegedly implemented by Ron Lomenzo, the senior vice president of financial operations, and Lisa Taranto, an employee who reported to Lomenzo.T Throughout much of 2001, WorldCom's revenue accounting group tracked the gap between projected and targeted revenue-an exercise labeled "close the gap"-and kept a running tally of accounting "opportunities" that could be exploited to help make up that difference.8 Many questionable revenue entries were later found within the Corporate Unallocated revenue account. On ]une 19,2001, as the quarter of 2001 was coming to a close, CFO Sullivan left a voicemail message for CEO Ebbers that indicated his concern over the company's growing use of nonrecurring items to increase revenues reported: Hey Bernie, it's Scott. This MonRev just keeps getting worse and worse. The copy, um the latest copy that you and I have already has accounting fluff in it . . . all one time stuff or junk that's already in the numbers. With the numbers being, you know off as far as they are, I didn't think that this stuff was already in there. . . . We are going to dig ourselves into a huge hole because year to date it's disguising what is going on the recurring, uh, service side of the business.e Afew weeks late1, Ebbers sent a memorandum to WorldCom's COO Ron Beaumont that directed him to "see where we stand on those one time events that had to happen in order for us to have a chance to make our numbers." Yet Ebbers did not give any indication of the impact of nonrecurring items on revenues in his pubiic comments to the market in that quarter or in other quarters. For that matter, the company did not address the impact of nonrecurring items on revenues in its earnings release or public filing for either that quarter or prior quarters.l0

Questions to answer:

Question 1)

How did this case impact the Balance Sheet of WorldCom?

Be specific... Which accounts would have been affected? How would they have been affected (overstated/understated)?

Question 2)

How did this case impact the Income Statement of WorldCom?

Be specific ... Which accounts were affected? How were they affected (overstated/understated)?

How was net income impacted? (overstated/understated

Question 3) What were the advantages that WorldCom was seeking through this case? (Why did they do what they did?)

Question 4)

Discuss the role that accounting should play in this situation. Which GAAP principle(s) are being violated?

• Specifically name the principle(s) that WorldCom violated (note: do not use the Full Disclosure Principle)
• Explain in detail the GAAP definition of the violated principle(s), and the importance of the principle(s) to users of financial statements
• Based on the case information, describe specifically how WorldCom violated the principle(s) you identified above

Question 5)

Discuss the ethical issues involved in this case.

Who was involved? Were their actions ethical or not? Be specific

Question 6)

Who was harmed as a result of this case? (be specific, and do not name the parties involved)

Can you think of any one else who could be harmed by a situation like this one?

Question 7)

If you were working as a bookkeeper or accountant at WorldCom when this was going on, what would you have done? Assume that you knew what was happening and that you were asked to violate the GAAP principles in question.

Please answer all of these and don't skip any as it is very important to me. I am requesting you