Question

Describe the mechanisms that WorldCom’s management
used to transfer profit from other time
periods to inflate the current period.

Answer 1

1.More specifically, in the third and fourth quarter of 2000, at the direction and with the knowledge of WorldCom’s senior management, Vinson Normand and others, by making and causing to be made entries in WorldCom’s books which improperly decreased certain revenues to reduce WorldCom’s line costs. This caused WorldCom to be overstated pretax earnings by $828 million and at least $407 million respectively.
Then, after WorldCom had drawn down its reserves so far that the revenue could not be drawn down further without taking what senior management believe was an unacceptable risk of discovery. Vinson Normand and others again at the direction and with the knowledge of senior management make and caused to be made entries in WorldCom’s books which improperly capitalized certain line costs for the next five quarters, from the first quarter 2001 through the first quarter of 2002. This accounting gimmick resulted in an overstatement of WorldCom’s pretax earnings by approximately $3.8 billion for those five quarters.