1999 to may 2002, I worked in Scott as the company's financial controller. With the participation of Scott Sullivan, auditor David Myers and chief accountant Bufford "Buddy" Yates, the company used false bookkeeping to cover up the deteriorating financial situation and fabricated profit growth to manipulate the stock price. They mainly use two means to implement financial fraud:
Write down the "line cost" (the cost of network interconnection with other telecom companies) and include this cost in fixed assets. False column "enterprise undistributed income" subjects inflated income. In a routine capital expenditure inspection in June 2002, the company's internal audit department found financial fraud as high as $3.852 billion, and immediately notified the external audit KPMG (KPMG recently replaced Andersen as the company's external audit). The scandal was immediately exposed, Sullivan was dismissed, Myers resigned voluntarily, and Andersen retracted the audit opinion of 200 1. On June 26th, 2002, the US Securities and Exchange Commission (SEC) launched an investigation into this matter, and found that during the two years from 1999 to 200 1, WorldCom's fictitious income reached more than 9 billion dollars. By the end of 2003, the company's total assets had expanded by about 1 1 billion dollars.
Fraud deficit method WorldCom's financial fraud methods are roughly as follows:
Abuse of reserves, write-off of line costs, write-off of line costs, and write-off of line costs with various reserves accrued in previous years (such as deferred tax, bad debt provision and accrued expenses) to exaggerate the profits reported to the outside world are the first type of financial fraud of WorldCom. The US Securities and Exchange Commission (SEC) and the Department of Justice have verified that the amount of such fraud is as high as $6,543.8+$63.5 million.
After reviewing the financial statements of the third and fourth quarters of June 5438+00, 2000 and February 5438+00, 2006, Sullivan thinks that the line cost accounts for a high proportion of the operating income, and the profit reflected cannot meet the profit expectations of Wall Street financial analysts, nor does it conform to the profit forecast previously provided by WorldCom to the investment public. To this end, Chief Financial Officer Sullivan ordered Chief Financial Officer meyers and Accounting Director Yates to reduce (credit) 828 million US dollars and 407 million US dollars in the third and fourth quarters respectively, and debit the same amount of deferred tax, bad debt provision and accrued expenses, so as to maintain the balance between loans and loans. This kind of fraud increased WorldCom's pre-tax profit by $828 million and $407 million in the third and fourth quarters of 2000 respectively.
In the third quarter of 200012000, Sullivan ordered the wireless communication department to write off the accrued bad debt reserve of $400 million with the line cost in order to make the announced profit meet the profit expectation of Wall Street. This inflated the pre-tax profit of 200 1 third quarter.
The above accounting treatment is not supported by original vouchers and analysis data, and it also lacks signature authorization and justifiable reasons. Meyers, Yates, Betty (director of management report department) and normand (chief accountant of subsidiary) finally succumbed to Sullivan's pressure and participated in fraud, although they knew that these accounting treatments lacked proper reasons and did not conform to generally accepted accounting standards.
Rush back the line cost and exaggerate the capital expenditure. WorldCom's senior management used "prepaid capacity" as an excuse to require all branches to charge back the line costs that have been confirmed as operating expenses and transfer them to capital expenditure accounts such as fixed assets, so as to reduce operating expenses and increase operating profits. The SEC and the Department of Justice have verified that the amount of such fraud is as high as $3.852 billion.
In April of 20001year, Sullivan checked the financial statements of the first quarter and found that the proportion of line cost to operating income was still high. Sullivan, meyers and Yates all realized that if we continue to use the fraud trick in 2000 to offset the line cost with reserve funds, it will be difficult to cover up the downward trend of profits. To this end, they decided to transfer the line cost that has been recorded in operating expenses to capital expenditure accounts such as fixed assets in the name of "prepaid capacity".
In order to put this fraud into practice, Sullivan instructed meyers and Yates to ask the accounting department of the general ledger to issue instructions to the accountants in charge of fixed assets records in local branches, and debit the fixed assets accounts according to the instructions after quarterly closing. For example, in April of 20001year, normand called the director of the fixed assets accounting department of WorldCom Company and asked him to make an adjustment entry in the name of "prepayment ability" in the financial statements of the first quarter of 20001year, debiting the fixed assets of 77 1 million dollars and crediting the line cost of 77 1 million dollars. When the director of the fixed assets accounting department asked for the original vouchers and accounting basis, normand told him frankly that these instructions came from the top and were personally instructed by Sullivan and meyers.
In the four quarters of 2000/kloc-0 and the first quarter of 2002, the amount of fraud planned by Sullivan, meyers and Yates, and implemented by normand and Betty according to the above methods reached 3.852 billion US dollars, which had a significant impact on the financial statements of the five quarters: the fixed assets increased by 3.852 billion US dollars, the line cost was underestimated by 3.852 billion US dollars, and the pre-tax profit increased by 3.852 billion US dollars accordingly. After squeezing out water, WorldCom's profit trend and competitor AT & amp； T is roughly in the same direction.
WorldCom adjusted its operating expenses to capital expenditures, which distorted the proportion of the line cost of its largest expense item to its operating income and fabricated huge profits, which seriously misled investors' judgment on WorldCom's profitability.
Like the first type of fraud, the accounting treatment involved in the second type of fraud is not supported by any original documents, and there is no proper authorization signature. It is worth mentioning that the second kind of fraud exaggerates the profit, but also exaggerates the cash flow generated by WorldCom's business activities. As can be seen from the annual report, WorldCom uses the indirect method to prepare the cash flow statement. Under the indirect method, the cash flow generated by operating activities is based on net profit and is obtained by adjusting cash and cash equivalents that are not involved. Other things being equal, overestimating profits will inevitably exaggerate the cash flow generated by business activities. In addition, according to the American cash flow statement standard, WorldCom's line cost expenditure belongs to cash outflow from operating activities and capital expenditure belongs to cash outflow from investment activities. Converting production line costs from operating expenses to capital expenditures is equivalent to reclassifying production line costs. Therefore, the cash outflow from operating activities should be reflected in the cash flow statement, but the result is reflected in the cash outflow from investment activities, which seriously misleads investors, creditors and other report users to judge WorldCom's cash flow creation ability.
It is bad to arbitrarily share the acquisition cost and deliberately underestimate WorldCom's goodwill. In addition to cheating on line costs, WorldCom also uses mergers and acquisitions for accounting manipulation. Using the so-called unfinished R&D expenditure (WIP R&; D) whitewashing statements is a common trick of American listed companies. Its practice is to allocate the purchase price to the unfinished R&D expenditure as much as possible and confirm it as a one-time loss during the current acquisition period, so as to reduce the amortization of goodwill or avoid impairment losses in the future. WorldCom, Cisco and other listed companies have repeatedly used this method to whitewash accounting statements in the past few years, which has been condemned by the SEC. Arthur, former chairman of the US Securities and Exchange Commission. Arthur Levitt pointed out in his famous article "Digital Games": "In recent years, all walks of life are rebuilding through merger, acquisition and spin-off. Some acquirers, especially those companies that use stocks as their acquisition currency, have regarded this environment as an opportunity to engage in another kind of "creative" accounting work. I call it' merging magic' ". Among the five cosmetic methods listed by Levitt (creative consolidated accounting, huge write-off, biscuit box preparation, importance and income recognition), the first two are universally used.
WorldCom uses creative M&A accounting to arbitrarily allocate the purchase price to the unfinished R&D expenditure. 1998 18 On September 4th, WorldCom acquired Microwave Communication Company (MCI) for $37 billion (about $33 billion in stock and the rest in cash). Although WorldCom did not disclose MCI's net assets on the acquisition date, the relevant annual reports showed that MCI's total assets, total liabilities and net assets were1388 million US dollars,193 million US dollars and 2.95 billion US dollars respectively at the end of 1998, and WorldCom198 had a goodwill balance of 44 billion US dollars.
When purchasing MCI, WorldCom originally planned to allocate $6 billion to $7 billion of the purchase price of $37 billion to the unfinished R&D expenditure and recognize it as a current loss to reduce the amount of goodwill recognition. The plan was intervened by the Securities and Exchange Commission. The SEC believes that this is WorldCom's revenue manipulation by using unfinished R&D expenditure. Under the pressure of the SEC, WorldCom finally decided to set this share at $3 1 billion, and confirmed it as a loss in 1998. However, WorldCom can't provide relevant evidence of this $365,438+billion "unfinished R&D project", nor can it explain why the amount allocated to unfinished R&D expenditure has dropped sharply from $6 billion to $365,438+billion. This arbitrary allocation of acquisition costs has led to a serious underestimation of goodwill.
On the one hand, WorldCom depressed its goodwill by confirming the unfinished R&D expenditure of $3 1 billion; on the other hand, it inflated its future profits by withdrawing the fixed assets impairment reserve of $3.4 billion. When purchasing MCI, WorldCom reduced the book value of fixed assets of MCI from 14 107 billion dollars to 107 billion dollars, which inflated the goodwill of purchasing MCI by 3.4 billion dollars. According to MCI's accounting policy, the average depreciation period of fixed assets is about 4.36 years. By withdrawing $3.4 billion from the impairment loss of fixed assets, WorldCom can reduce the depreciation by about $780 million every year in the next four years after purchasing MCI.
The inflated goodwill of $3.4 billion is amortized over 40 years, about $85 million per year. After the annual depreciation reduction of $780 million was offset by the amortization of goodwill of $85 million, WorldCom inflated its pre-tax profit from 1999 by about $695 million to 200 1 every year.
Using the change of accounting standards, WorldCom finally confirmed the goodwill formed by the acquisition of MCI as $30,654.38 billion, and amortized it within 40 years. In the past five years, WorldCom's goodwill and other intangible assets accounted for about 50% of its total assets. High goodwill has become a heavy burden that restricts WorldCom's operating performance. To this end, WorldCom takes the change of accounting standards as an "opportunity" and uses huge write-offs to digest the expensive goodwill formed by mergers and acquisitions.
The Financial Accounting Standards Committee (FASB) issued the standard "Goodwill and Other Intangible Assets" in July, 20001year, which no longer requires listed companies to amortize goodwill and intangible assets with uncertain service life, but to conduct impairment test and make provision for impairment. The introduction of this criterion has made WorldCom a treasure.
In the financial report of 20001,WorldCom issued an early warning that its performance in 2002 would drop sharply, and planned to draw15-20 billion USD for goodwill impairment in the second quarter of 2002. WorldCom executives bluntly said that WorldCom can reduce the amortization expense by10.30 billion USD every year, because the standard10.42 no longer requires amortization of goodwill and other intangible assets with indefinite service life.
How to make provision for impairment of intangible assets, especially goodwill, is a big problem faced by financial accounting. In the first half of 2002, WorldCom hired Ernst & Young. Young) evaluates the goodwill according to the requirements of the standard 142, and plans to confirm the one-time impairment loss of goodwill in the second quarter150 ~ 20 billion US dollars, with a valuation difference as high as 5 billion US dollars. After the accounting fraud scandal was exposed, WorldCom hired an American evaluation company to conduct a comprehensive evaluation of goodwill and other intangible assets, and reached the conclusion that goodwill and other intangible assets with a book value of more than $50 billion were worthless, and planned to make full provision for impairment after all accounting fraud problems were identified. It is amazing that there is such a big contrast between the two famous evaluation agencies in the same fiscal year in evaluating WorldCom's goodwill.
In March, 2003, WorldCom announced that it expected to recover more than $654.38 billion in profits in the first quarter. This estimate is based on the full or large amount of impairment provision for intangible assets (mainly goodwill) and fixed assets. It can be seen that it is the secret of WorldCom to take advantage of the changes in accounting standards to take a "big bath" on intangible assets and fixed assets and greatly reduce depreciation and amortization. Perspective on Financial Fraud of WorldCom Company