In the late 1990s, WorldCom enjoyed the status as one of the most leading company in the telecommunication industry. However around 2000 in the wake of the declining earnings and profitability, the company started depending on fraudulent accounting practices in an attempt to exaggerate its accounting books so that it could easily prevent the price of the stock from decreasing. This was eventually done by capitalizing its line cost in the Balance Sheet instead of expensing them in the Income Statement. These understated costs resulted in overly exaggerated profits of the company. Moreover, they increased their profits by using false accounting entries through corporate unallocated revenue accounts.
1. Why were the actions taken by WorldCom managers not detected earlier?
2. What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom?
3. Were the external auditors and board of directors blameworthy in this case? Why or why not?