Behind Closed Doors at WorldCom Essay

1.Two General Accounting employeesDan Renfroe and Angela Waltermade journal entries in the amount of $150 meg and $171 million, respectively, with step forward detailed support. It was noned that this was not out of the ordinary at WorldCom. In your cerebration, was this a proper accounting f atomic number 18? Explain. Though this may not be out of the ordinary for WorldCom, this is not a correct accounting practice. The way the entries were made does not accept with the proper account practice according to GAAP. Detailed support is an important part of providing support to a journal submission and it explains the reason or purpose as to why the journal entry was created.2.Based on GAPP, take in the propriety or impropriety of releasing of $150 million in aura cost accruals in the wireless division over Deloris DiCiccos objections. Support your position using the authoritative accounting literature. When instructed to reduce the Wireless Divisions plication cost by $150 mi llion due to savings from the prior period, DiCicco refused because there was no support for the entry.  WorldCom would furbish up an adjusting entry each month to recognize the estimated cost of the period as period expense, by capitalizing the expense as an accrued interest. According to GAAP, a commercial enterprise item cost must be reported as an expense on a confederacys income statement. WorldCom capitalized the literary argument expense, or else of expensing it and placed it on the balance sheet as an accrued obligation rather than on the income statement as an operating expense.3.On the topic of capitalizing line costs, critique the rationale included in CEO Scott Sullivans white-hot Paper. Based on your own analysis of GAAP, explain the propriety or impropriety of capitalizing line costs in the telecom industry. In the clean-living Paper presented to the Board of Directors, the CEO Scott Sullivan supported the decision to capitalize line costs. Sullivan provid ed that the White Paper was in line with the companys close of maintaining strong growth rate through increasing its capital investment. way noted that the treatment of the E/R cots as an addition was in no way in any contradiction of the definition of an asset as per FASB Concept Statement No. 6 which states, Assets are apparent future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. However, as per GAAP, line costs must be reported as an expense in the companys income statement as these are fundamentally, operating expenses. It was cast in the Balance Sheet as an accrued liability rather than in the income statement as an accrued expense. This resulted in falsely intercommunicate income and profits and concealing huge losses by wrongly capitalizing the line costs.4.Consider journal entry that recognized $35 million of revenue in 2001 from the EDS contract based on WorlComs expectation that the five-year call for cumulative minimum payment would not be met. Based on your own analysis of GAAP, explain the propriety to impropriety of this journal entry. This is not in compliance with the provisions of GAAP or SAB 101. Revenue should not be recognized until it is realized or becomes realizable and earned. If we followed this statement the company did not turn in realized revenue Furthermore, the penalty payments if enforced could not be paid till the year 2005 as stated in the contract. Also, the journal entry resulted in recognizing revenue when it was not earned or realized and thus, overstated the profits.5.Why do you suppose the professionals in this case, most of whom are CPAs, would agree to record a material journal entry contrary to their best professional judgment? I think that in many situations employees were able to twist statements which follow GAAP guidelines. May employees were convince they were doing the right thing and those that were unwilling to participate were overlooke d. Most of the material journal entries which were made contrary to best judgment were so done with a view to mask the declining profits and to show increasing profits, which in become would increase stock prices.6.In general, how does the role of intimate Auditing differ from the role of breakaway (or External) Auditing? What is the role of internecine Auditing in a well-run corporation? When performed by innate auditors, what is a monetary audit versus an operating audit? Do you think WorldComs Internal Audit Department was functioning as it should have been? Explain. Internal auditors doing within an system of rules and report to its audit charge and/or directors. They help to design the companys organizing systems and help intermit specific risk management policies. External auditors are independent of the organization they are auditing. They report to the companys shareholders. They provide their experienced opinion on the truthfulness of the companys financial statem ents and perform work on a test basis to monitor systems in place. Internal Auditing is designed to look at the key risks facing the crease and how the business is managing those risks effectively. It usually results in recommendations for improvement across departments. Internal auditing is an independent, objective pledge and consulting activity designed to add value and improve an organizations operations.It helps an organization accomplish its objectives by bringing a systematic, disciplined mount to evaluate and improve the effectiveness of risk management, control, and governance processes. A financial audit is an audit or examination of the financial reporting process, ascertain the reliability and integrity of the financial statements and preparation of such statements. It also involves an estimation of the internal controls related to the finance function of the enterprise. An operational audit, on the another(prenominal) hand, is a systematic review and evaluatio n of an operational unit in terms of its effectiveness and efficiency of operations, accomplishment of its laid down objectives and goals, and ascertain its appropriateness in the use of various resources. It is clear that the WorldComs Internal Audit department was not functioning as it should have been. It was concentrating except on operational audits and totally avoiding financial audits. On the cause of cost-saving, it intelligibly avoided any and every function which could overlap with the role of the external auditors.