routinely reviewed the distribution list for the full MonRev to make sure he approved of everyone on
Question:
routinely reviewed the distribution list for the full MonRev to make sure he approved of everyone on the list.
The total amounts reported in the Corporate Unallocated schedule usually spiked during quarter-ending months, with the largest spikes occurring in those quarters when operational revenue lagged farthest behind quarterly revenue targets – the second and third quarters of 2000 and the second, third, and fourth quarters of 2001. Without the revenue that was recorded in the Corporate Unallocated account, WorldCom would have failed to achieve the double-digit growth it reported in 6 out of 12 quarters between 1999 and 2001.
Process of Closing and Consolidating Revenues
WorldCom maintained a fairly automated process for closing and consolidating operational revenue numbers. By the 10th day after the end of the month, the revenue accounting group prepared a draft “preliminary” MonRev that was followed by a final MonRev, which took into account any adjustments that needed to be made. In non-quarter-ending months, the final MonRev was usually similar, if not identical, to the preliminary MonRev.
In quarter-ending months, however, top-side adjusting journal entries, often very large, were allegedly made during the quarterly closing process in order to hit revenue growth targets. Investigators later found notes made by senior executives in 1999 and 2000 that calculated the difference between “act[ual]” or “MonRev” results and “target” or “need[ed]” numbers, and identified the entries that were necessary to make up that difference. CFO Scott Sullivan directed this process, which was allegedly implemented by Ron Lomenzo, the senior vice president of financial operations, and Lisa Taranto, an employee who reported to Lomenzo.
Throughout much of 2001, WorldCom’s revenue accounting group tracked the gap between projected and targeted revenue – an exercise labeled “close the gap” – and kept a running tally of accounting “opportunities” that could be exploited to help make up that difference.
Many questionable revenue entries were later found within the Corporate Unallocated revenue account. On June 19, 2001, as the second quarter of 2001 was coming to a close, CFO Sullivan left a voicemail message for CEO Ebbers that indicated his concern over the company’s growing use of nonrecurring items to increase revenues reported:
Hey Bernie, It’s Scott. This MonRev just keeps getting worse and worse. The copy, um the latest copy that you and I have already has accounting fluff in it… all one time stuff or junk that’s already in the numbers. With the numbers being, you know, off as far as they are, I didn’t think that this stuff was already in there. … We are going to dig ourselves into a huge hole because year to date it’s disguising what is going on the recurring, uh, service side of the business.
A few weeks later, Ebbers sent a memorandum to WorldCom’s COO Ron Beaumont that directed him to “see where we stand on those onetime events that had to happen in order for us to have a chance to make our numbers.” Yet Ebbers did not give any indication of the impact of nonrecurring items on revenues in his public comments to the market in that quarter or in other quarters. For that matter, the company did not address the impact of nonrecurring items on revenues in its earnings release or public filing for either that quarter or prior quarters.
Provide one specific example of how WorldCom violated the revenue recognition principle in this situation. In your description, please identify a journal entry that may have been used by WorldCom to commit the fraud.