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On June 9 2003, the U.S. Bankruptcy Court of New York issued a report on the WorldCom accounting fraud that expands on the court's earlier findings of mismanagement, lack of corporate governance, and concern regarding the integrity of the company's accounting and financial reporting functions.

Understandably, there are a variety of ways in which a company can manage their earnings, and if accomplished successfully, the results can be highly profitable. Not all techniques are fraudulent, as effective earnings management is considered good for business and shareholders. Income smoothing is a specific example of permissible earnings management that involves controlling fluctuations in net income to make earnings less variable over a given period of time (Goel & Thakor, 2003). Smoothing is acceptable as long as it adheres to the restrictions of U.S. GAAP, which maintains that all revenues and expenses are accounted for in a defined fashion. There are a lot of incentives in figuring how to effectively smooth income, as substantial value can be created through the successful arrangement of financial transactions. Management is able to make more intelligent decisions with regards to the future of the firm if the earnings are able to match the forecasts. One instance this is seen is when management is faced with the decision to smooth total income or

Fraudulent financial reporting is one form of corporate corruption and may involve the manipulation of the documents used to record accounting transactions, the misrepresentation of accounting events or transactions, or the intentional misapplication of Generally Accepted Accounting Principles (GAAP) (Crumbley, Heitger, and Smith, 2013). Examples of fraudulent schemes befitting of this category abound and usually involve financial statement items that have been misclassified, omitted, overstated, undervalued, or prematurely recognized. One case involving CEO Bill Smith of Moonstay

Using the financial balance sheet as displayed in the text, provide an example of how purchasing an asset or issuing stocks or bonds could potentially impact earnings targets.

Another corporate accounting scandal that occurred in the United States before the Sarbanes-Oxley Act came into effect was the WorldCom scandal in 2002. Seventeen thousand employees were fired and $3.8 billion dollars in profit were removed from their accounting books after an internal audit discovered improper expense accounting in 2001 and 2002. This improper accounting inflated the cash flow so the company would not report a net loss, only a net gain (Hancock, 2002).

Following the several financial scandals of the early 2000s involving the former notorious companies such as Enron and WorldCom corporations, the Sarbanes-Oxley Act of 2002 emerged. Indeed, SOX required that every publicly traded company CEO and CFO endorse the accuracy of their organizations financial statements prior to the official release. Obviously, the idea behind this decision is certainly a way to ensure the integrity of the upper management which dismisses the existence fraud on the financial statements. However, a discovery of fraudulent information on certified financial statements is subject to civil liabilities and criminal prosecutions.

The WorldCom fraud case exemplifies almost everything that is wrong with corporate America today. People become obsessed with money and success and forget what it means to be an honest human being. Business is a natural human concept. Barter and trade for goods and services are necessary to the proper function of a society. However, throughout time, rules have been put in place to ensure fair practices and a level standard for which profits can be evaluated. As meticulous and frustrating as they may have seemed in Accounting 201 last year, I can understand that there are legitimate reasons for all of the rules and regulations the industry has put in play. These rules are the definition of industry standard; every accountant is aware of them.

In an essay written by Reza Monem on “The One-Tel Collapse: Lessons for Corporate Governance” he says “It (One-Tel) was able to report small positive earning in its early years due to non-conservative accounting policy choices and large positive accruals.” (2). Large amounts of expenditure and loss were deferred to future years and losses were concealed, both of these actions being a result of not following the principle of conservatism. In 1998-99, ASIC found $48 million of expenditure and a loss of more than $40 million had been concealed in the financial statements of the company (2). Worldcom, a US based telecommunications company also went bankrupt largely due to poor financial management in 2002. Similarly to One-Tel, it failed to follow the two accounting principles of conservatism and reliability. Conservatism was not followed by Worldcom with its handling of line cost expenses. These expenses were not included in their reports and resulted in them providing misleading information. It led people to believe that it made over $107 billion in profit and only $3.7 billion in expenses (4). This however was found to be grossly incorrect as they had, in fact, had $107 billion in losses. Both companies overall failed to comply with the principle of conservatism and this was one of the main reasons leading to their bankruptcy.

The negative profit projections could have triggered a pressure situation for the executives, thus Koornhof and Du Plessis (2000) identified that an increasing financial pressure on a company’s management to report favourable results on a constant basis is the main reason for deliberately misstating financial statements. Furthermore, companies which are facing financial distress are more likely to commit fraud (Albrecht et al., 2012, p. 147).

As with other disciplines, all personnel in the accounting profession ought to uphold high standards of professional ethics. All firms ought to conduct their affairs with due regard to the welfare of the parties involved, the economy, and the interests of the public in general. As such, auditors and accountants ought to be ambassadors of transparency and accountability and their conduct must indicate as much. In the wake of the housing bubble, the integrity of the accounting profession came into question amid claims by observers that key professional services firms such as Deloitte Touché, PricewaterhouseCoopers (PwC), KPMG, and Ernst & Young were colluding with their client firms to perpetuate 'deceptive accounting' in a way that the financial position of the client-firm appeared more stable and progressive. This helped the global financial crisis along. Amid the crisis, world economies tanked causing the fall of major economic giants. The unprecedented collapse of Lehman Brothers, American International Group (AIG), General Motors, WorldCom, Enron, Fannie Mae and Freddie Mac nearly took the global economy down with it. In light of emerging studies, corporate malfeasance was one of the leading causes for the collapse. All firms ought to conduct their affairs with due regard to the welfare of the parties involved, the economy, and the interests of the public in general under

Lastly, company participates in good earnings management is because it provides a way to present information to its present and potential investors about their operations. Actions such as these that achieve stable and predictable results and positive earnings trends through good planning and operational responsiveness are not illegal or unethical in any way, its just part of business. All businesses try to reach their targets and try to continue seeing growth while responding to their competition and changes in the market. Good earnings management just allows the company to continue their operations with some type of goal to achieve or target to reach. This only becomes a bad thing when those goals or targets are not reached and someone starts making up the numbers.

The fraud was committed by generating assets out of operating expenses and inflating revenues to continue reporting double-digit revenue growth and false statement of stock prices. WorldCom 's fraudulent, false and improper action of its line cost expenses, was not disclosed to its investors. WorldCom did not disclose to its investors, or elsewhere, that it had executed such changes in its procedures of accounting for line cost expenses. As a result of these fraudulent, false and improper accounting manipulations, “WorldCom materially overstated its earnings as well as its assets and materially

Audited by Arthur Andersen, WorldCom went under investigation by the SEC for accounting fraud. Not only was cash flows overstated by booking $3.8 billion in operating expenses as capital expenses, $400 million was given to Bernard Ebbers, the CEO, in off-the-book loans. WorldCom stunned Wall Street with additional improperly booked funds total to $3.4 billion bringing a total restatement of $7.2 billion. WorldCom was prosecuted by DOJ, SEC, US Attorney's Office for the Southern District of New York and various congressional committees.

P., & Coulter, M. K., 2012, p. 152), although it seems none of WorldCom’s executive management team seemed to feel this way. Many steps could have been taken to prevent the collapse of the WorldCom empire, but only a few key managers held the power and none were willing to take action. One control that did not exist in WorldCom’s culture was allowing both internal and external auditors access to all necessary documents and statements. Without full disclosure of these items no one could see how many risks the company was taking by making fraudulent entries against their books. Also the external audit team, Arthur Anderson, held WorldCom as one of its best customers which was a major conflict of interest. This relationship lead to many fundamental mistakes from Anderson not keeping pressure on WorldCom and getting all vital information that would prove how poorly the company was being run. Had they been operating transparently, auditors and employees would have seen the accounting deception and could potentially have stopped it prior to the company’s collapse. In addition, by employing multiple auditing firms many of the mistakes being made may have been caught and discontinued from the beginning.

In finance, the proposed objective of the firm is the maximisation of economic profit. This ‘maximising’ objective is expressed in terms of the market value of the firm’s shares. These notions should not be confused with accounting profit which usually attempts to match periodic revenues and expenses as well as other concepts. As a result, accounting profit is somewhat arbitrary and fails to take account of all factors which affect shareholders’ wealth.