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Worldcom Fraud Case Study

Using the case below please help with these questions:
Accounting Fraud at WorldCom
By Robert . Kaplan and David Kiron
http://www.hbs.edu/faculty/Pages/item.aspx?num=31127

1. What are the pressures that lead executives and managers to "cook the books?"
2. What is the boundary between earnings smoothing or earnings management and fraudulent reporting?
3. Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom?
4. Were the external auditors and board of directors blameworthy in this case? Why or why not?
5. Betty Vinson: victim or villain? Should criminal fraud charges have been brought against her? How should employees react when ordered by their employer to do something they do not believe in or feel uncomfortable doing?

Solution Preview

1. What are the pressures that lead executives and managers to "cook the books?"

The executive team was focused on meeting the expected financial earnings given by analysts. They wanted to ensure that the stock price continued to increase every quarter, which in turn would increase their personal shares in WorldCom stock. According to Ebbers, the goal was to be the No. 1 stock on Wall Street. The key to increase the company's market value was to continue the revenue growth.

2. What is the boundary between earnings smoothing or earnings management and fraudulent reporting?

Earnings management is manipulating reported earnings by not accurately representing economic earnings at a specific point time. Whereas, earning smoothing is a special case of earnings management which includes inter-temporal smoothing of earnings relative to economic earnings. Fraudulent reporting occurs when material and intentional misrepresentation of result, which is determined by the Securities & Exchange Commission. Earnings smoothing can be artificial or real. Real earning smoothing includes a decision that will affect cash flows and decrease firm value. Artificial earning smoothing doesn't impact cash flow, which is allowed ...

Solution Summary

The pressures which lead executives and managers to "cook the books?" are determined.

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