WorldCom is among the main global communications providers. It operates in more than sixty-five countries. It offers services in data transmission as well as internet services for the businesses. Through its MCI units, it is also able to provide telecommunications services to its consumers and businesses. The excellent services of WorldCom in telecommunication industry escalated in the 1990s. However, at a time when the economy cooled in 2001, WorldCom’s earnings as well as profits declined drastically (Zekany, Braun, and Warder, 2014) . The act made it difficult for WorldCom to keep in line its earnings with the expectations of the industry analysts. However, from the start of 2001, WorldCom engaged in improper accounting schemes which intend to keep them in line with the expectations as per the Wall Street’s. In this regard, therefore, this paper intends to address and analyze the improper capitalization of operating expenditures at WorldCom and the impact to WorldCom and to investors.
The issues of securities and exchange of commission in WorldCom raised several alleges about the complaints incurred. From the first quarter of 2001 to the first quarter of 2002, WorldCom defrauded their investors and the WorldCom community in general. In a scheme that was directed and approved by the senior manager indicated its operating performance by use of disclosed as well as improper capitalization that surely indicated the income before the income taxes as well as the minority interests. In the first quarter of 2001, the taxes accrued to $3,055 billion and $797 million in the first quarter of 2002 (Zekany, Braun, and Warder, 2014) . WorldCom betrayed its current investors as well as the prospected customers. It was achieved through improper transfer of certainly given costs to the specific capital accounts in 2001. The processes of WorldCom that transfer the cost to its capital accounts lead to a violation of the specific established standards to run the organization about the acceptable accounting principles.
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However, the improper transfer of certain cost to its capital account was not disclosed to the individual investors in time. Therefore, it leads to a misleading report concern WorldCom earnings. The main for the improper accounting action intended to manipulate WorldCom’s earnings for the year ending 2001 (Sadka, 2006) . In the case of the first quarter of 2002, it intended to put them in line with an estimate through the use of Wall Street analysts. By so doing WorldCom, violated the anti-fraud as well as reporting provisions of the federal securities and laws. For this case, the commission decided that WorldCom should pay a monetary penalty, apart from enjoining them from more violations of the federal securities.
The major operating expense for the industry was line costs. It represents the fee which WorldCom paid to a third party telecommunication network provider for the rights of accessing the third party’s network (Zekany, Braun, and Warder, 2014) . According to the accounting rules such fees should not be capitalized . In this case, therefore, WorldCom materially underreported its specific expenses and in the process it materially overstated the exact earnings, hence defrauding its investors.
From the above explanations, it is evident that WorldCom incurred major losses at the expense of making profits. It leads to capitalization of the services provided and offered at the same time. Most of its capitalization happened in 2001 and 2002 respectively. The effects were particularly felt by the investors as well who were not informed timely on the idea. As a result WorldCom had to pay for the specific losses that were incurred by the customers. For a real interaction with the analysts, they have to change the impacts.
References
Sadka, G. (2006). The economic consequences of accounting fraud in product markets: Theory and a case from the US telecommunications industry (WorldCom). American Law and Economics Review , 439-475.
Zekany, K. E., Braun, L. W., & Warder, Z. T. (2014). Behind closed doors at WorldCom: 2001. Issues in Accounting Education , 101-117.
