The WorldCom fraud described in the text is one of the simplest frauds committed. Company executives simply took expenses and made them into assets. They did this with a simple adjusting entry: debit assets, credit expenses, and the expenses recorded on the income statement (lowering net income) became assets (having no effect on net income.) The chapter description of WorldCom posed several questions.
a. Did outsiders receive information that was relevant and reliable when they reviewed WorldCom’s financial statements?
b. Was the information free from bias?
c. Did the capitalized assets recorded on WorldCom’s books “faithfully represent what they claimed to represent”? Were they really assets?
d. Did shareholders have the information to make a good decision regarding
WorldCom if they held its stock?
e. Could lenders make a good decision regarding WorldCom loans? Explain your answer.