Identifying and Describing the Ethical Issue. Worldcom Essay

Identifying and Describing the Ethical Issue. Worldcom - Essay Example The company manipulated the company's financial results in order to meet Wall Street expectations and artificially inflate their stock price amidst declining financial performance. Treating operational expenses as capital investments inflated the company's operating income since expenses are supposed to be accounted for in the quarter that they are incurred, instead of being spread out over a period of years. In this case this illegal accounting practice allowed Worldcom to treat operational expenses that should have been fully recognized each operating quarter as a long term capital expenditure, where related costs are expensed during the operating lifetime of a specific asset instead of being accounted for during one specific accounting period. As a result three former Worldcom executives were convicted of accounting fraud. David Myers, the third executive in command and Worldcom's former controller, was convicted to one year and one day in prison. The former controller received a much lesser sentence than the other executives due to his early admission of responsibility and remorse as well as extraordinary cooperation with the government in exposing the extent of the fraud including the major players involved (Cbsnews, 2009).Scott D. Sullivan, Worldcom's former chief financial officer, was convicted to five years in prison as part of a plea agreement in which he testified against the company's CEO Bernard J. Ebbres. Bernard Ebbres was eventually convicted to 25 years in prison for the Worldcom accounting fraud ultimately leading to the company's bankruptcy (Sullivan, 2013). In 2001Worldcom reported $7.7 billion in cash flow from operating activities instead of the true amount of $4.6 billion as a result of misrepresenting $3.8 billion of operational expenses resulting from the Sprint merger. Mr. Sullivan failed to inform Arthur D. Anderson, the firm's accountant at the time, of his decision to treat the expenses as capital expenditures in a clear and blatant attempt to disguise his illegal accounting manipulations from the accounting firm. This deceptive accounting manipulation resulted in the company overstating its EBITDA (earnings before interest, taxes, depreciation and amortization) which is the barometer that most investors utilize to evaluate a company's overall financial health and performance. As the company started the accounting fraud in the first quarter of 2001, Worldcom reported an EBITDA of $2.1 billion instead of $1.4 billion. By the end of 2001 the company had originally reported an EBITDA of $10.5 billion instead of the correct figure of $6.3 billion. Consequently Worldcom reported a profit of $1.4 billion for 2001 and $172 million in the first quarter of 2002, where in reality the company had loses amounting to billions during that accounting period (Eichenwald, 2002). This accounting fraud directly violates the accounting principles of reliability in accounting practice, as well as the â€Å"full disclosure† and the â€Å"matching† principle, where all expenses incurred during an accounting period are matched with the period revenues which it directly affects (Businessweek, 2002). Explaining Alternative Courses of Action and Related Trade-Offs B) Troy Normand, as the manager for the corporate reporting department, was responsible of the accuracy and reliability of corporate financial reports. Based on his testimony and full account of the conversation with Scott Sullivan regarding the events that transpired, we can conclude that Mr. Normand was in full knowledge and understood the implications and illegal nature of the accounting treatment given to the Sprint merger expense accounts. Therefore his actions regarding the treatment of the Sprint expense accounts was both unethical and illegal