Worldcom Case Response

1280 Words Apr 27th, 2015 6 Pages
Michael Dobe Jr. Bernie Ebbers(left)
5340–Ethics CEO
Timothy McCoy
4/6/2015 Scott Sullivan(right) CFO&CPA

1. Two General Accounting employees-Dan Renfroe and Angela Walter-made journal entries in the amount of $150 million and $771 million, respectively, without detailed support. It was noted that this was not out of the ordinary at WorldCom. In your opinion, was this a proper accounting practice? Explain. Normally at the end of each month, Worldcom would estimate the costs of using “Off-net” facilities and connections. Worldcom would accrue these liability estimates. Line cost accrual estimates were very difficult to estimate with precision, especially for international services.
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There were times when Worldcom HAD excess accruals and chose not to release them. This was to sustain the financial Line E/R ratio. This is definitely not an appropriate practice because expenses need to be recognized in accordance with the matching principle. It is not acceptable to hold expenses for a later date when you have excess revenue and can afford to recognize held back expenses.
3. On the topic of capitalizing line costs, critique the rationale included in CEO Scott Sullivan's
White Paper. Based on your own analysis of GAAP, explain the propriety or impropriety of capitalizing line costs in the telecom industry. Sullivan explained his rationale in a report to the Board of Directors referred as the “white papers.” In order to meet the customer demand for Internet and data expected to increase at the 8 times annual growth factor, Worldcom had to significantly increase its capital investments. Lease commitments were established to expedite the customer provisioning and revenue stream in accordance with SAB 101, and supplemented by FASB 91, “direct and indirect costs associated with obtaining a customer may be deferred and amortized over the revenue stream associated with that contract.” So instead of recognizing these expenses immediately, the portion of the unused capacity was able to be expensed later when the revenue was realized. This might have been an O.K. practice in accordance of GAAP if the capitalization of these line costs

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