Worldcom Essay

445 WordsMar 19, 20132 Pages
Understanding WorldCom WorldCom’s Violation of GAAP WorldCom was a Clinton, Mississippi-based company incorporated in Georgia that provided a broad range of communications services to businesses and consumers in more than 65 countries. WorldCom provided data transmission and Internet services for businesses, and, through its MCI unit, provided telecommunications services for businesses and consumers. WorldCom was a public company whose securities are registered with the Commission pursuant to Section 12(b) of the Securities and Exchange Act and its common stock was listed and traded on the NASDAQ National Market System under the symbol "WCOM," and its stock was covered by Wall Street analysts who routinely issued quarterly and annual earnings estimates. Anticipating unabated growth in telecommunications services, WorldCom entered into a number of long-term lease agreements with various third-party telecommunication carriers to gain the right to access these networks in the late 1990s. Many of these leases required WorldCom to pay a fixed sum to the third-party carrier over the full term of the lease regardless of whether WorldCom actually made use of all or part of the capacity of the leased facilities. Originally, these fees were recorded by WorldCom employees on its books and records as "line costs," current expenses which would be reported as part of WorldCom's operating expenses on its income statements. Beginning in or around July 2000, WorldCom's expenses as a percentage of its total revenue began to increase, resulting in a decline in the rate of growth of WorldCom's income. This decline in income created a substantial risk that WorldCom's publicly reported income would fail to meet the expectations of Wall Street analysts and that the market price of WorldCom's securities would therefore decline. In or around October 2000, WorldCom officers and

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