Expense capitalization and Accrual expenses audit
Description of audited area
The Company’s problems started with the dot-com bubble burst and following reduced demand on infrastructure when it had the vast oversupply in telecommunications capacity.
WorldCom increased its net income and assets by transferring part of its current expenses to capital account. By doing this, the expenses were understated and capitalized costs were treated as an investment. The Company managed to spread its expenses into the future and showed much higher net income in order to boost its financial performance.
During that time the Company experienced troubles and the revenue has fallen while debt taken on to finance mergers and infrastructure investment remained the same. Ultimately, the market value of the Company’s common stock plunged from about $125 billion in 2000 to less than $150 million as of July 1st 2002. Overall, more than $9 billion in false or unsupported accounting entries were made in WorldCom’s financial systems in order to achieve desired reported financial results. (WorldCom stock price)
Quantification of Findings
We have audited the accompanying balance sheets of WorldCom Corporation as of December 31, 1999 and December 31, 2000, and the related statements of income, cash flow, and stockholders’ equity for the period ended December 31, 1999 and December 31, 2000.
During our review of the income statement we noticed that the Corporation mistakenly releases accruals and capitalize expenses that should be charged on expenses. Team B. obtained the following audit evidences:
Line costs are WorldCom’s largest single expenses (Line costs are what WorldCom pays other companies for using their communications networks). Beginning in 2000 WorldCom had been trying to find ways to reduce line cost expenses.
While US GAAP requires companies to estimate expected payments from line costs and match them with revenues in the...