Long Distance Rates And Revenue

990 WordsMay 2, 20164 Pages
As long-distance rates and revenue declined, the debt and expenses piled up and put pressure on WorldCom’s ability to meet key-performance indicators and earnings forecasts (J. Randel Kuhn & Sutton, 2006). The line cost was the biggest expense for WorldCom and half of its total expenses. Management committed to achieve a low line cost to revenue ratio because lower ratio meant better performance and higher ratio meant poorer performance. Management focused on lowering the line cost level expense (J. Randel Kuhn & Sutton, 2006). It carried out two improper accounting methods to reduce the amount of line costs (Beresford, Katzenbach, & C.B. Rogers, 2003). First, it released the accruals, the amounts kept aside on WorldCom’s financial statements to pay expected bills which is also called “cookie jar reserve” from 1999-2000 (Beresford, Katzenbach, & C.B. Rogers, 2003). These accruals were supposed to reflect the estimate line costs and other expenses that WorldCom had not yet paid (Beresford, Katzenbach, & C.B. Rogers, 2003). Releasing the accrual is appropriate when it turns out that less is needed to pay the bills than has been expected to pay. Instead, WorldCom provided offset against reported line costs when the accrual was released which reduced reported expenses and increased pre-tax income (Beresford, Katzenbach, & C.B. Rogers, 2003). When the accruals started to run out, WorldCom came up with another method, capitalization of line costs. WorldCom started classifying
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