Case 2-1 Cynthia Cooper and WorldCom 1) What are the rules in accounting for determining whether to expense

certain costs against revenue versus capitalizing and amortizing the costs? How do the different treatments affect earnings? Why did Cooper believe the treatment did not conform to GAAP? In a world full of things to be accounted for, there are several rules and regulations to be followed in order to achieve uniformity and reliability of data. Having the case of WorldCom, the recognition of expenses and capitalization and amortization of costs was the primary issue. Technically, an expense should be recorded and matched against revenue when incurred and the expenditures would only benefit the operation for a relatively short period of time. In the cash method of accounting, expense is recognized upon payment. But in accrual basis method, expense is recognized when incurred regardless of payment. Technically, this is in conformity with some of the generally accepted accounting principles which are the Matching principle and the Accrual principle. On the other hand, cost capitalization is observed if a major expense merits recognition as an investment of capital funds instead of being recognized as an expense for the year. To capitalize an asset, it must have a useful life that extends beyond the current year and the assets should be used to conduct the business. Related policies are largely based on the function of the asset purchased or the purpose of the expenses incurred. There is the matter of determining if the costs can be harnessed to benefit future objectives and would continue to be beneficial to the firm for a long period of time. Realistically, these different treatments would widely affect the income statement due to inconsistency. If a company would be incurring expenses and would match it against revenue, then the resulting income would be lower. Conversely, if the expense would be capitalized, then there would be a higher resulting income and even a higher amount of asset. Simply, the matter of inconsistency will open avenues for financial presentation manipulations, while unmatched revenues or expenses can result in under- or overstatement of the annual income, defrauding both the internal and external users of their financial reports. Having these concepts discussed, the evident primary reason of Scott Sullivan for capitalizing the line costs incurred by the company would be to give the users of their financial reports a better and attractive picture of WorldComs profitability standing. Needless to say, upon capitalizing their costs, there would be an overstatement of annual

income and thus, providing the public with the mindset that WorldCom is really being profitable. However, Sullivans actions might be for the sake of protecting the busin ess since there is a clear possibility that WorldCom would be devastated if the $ 3.8 billion dollars would be recorded and presented publicly. But, this is no excuse for a businessman to manipulate its financial performance for it may lead to bigger disasters when such anomalies would be discovered. Having the stand of Cynthia Cooper, it is nothing but evident that the executives of the company are trying to hide a significant amount of expenses incurred which did not even materialize as revenues. This is caused by the sudden implosion of telecommunications in the late 1990s and 2000. In the case, the records did not match which is alarming because there is definitely something wrong with the recording of the transactions. Also, the concept of prepaid capacity does not necessarily apply in the situation of WorldCom and therefore, making it quite doubtful. Just by having different doubts as to the financial standing of the company, Cynthia Cooper, as an auditor, would really investigate and go further in the analysis of the reports in order to uncover the truth behind the accounts and present the real financial position and performance of WorldCom. 2) Analyze Coopers use of professional judgment in the WorldCom case. How do her actions relate to Rests four stages of moral development. Accountants should exercise sensitive professional and moral judgments in all their activities. Technically, professional judgment should be an accountants attribute since this is the foundation of reputation and reliability. In the case of WorldCom and Cynthia Cooper, it is apparent that Cooper remained professional and used moral judgments upon and during her discovery of the unethical accounting practices being used by the company. She remained persistent and was never discouraged to stop her discovery when she revived inconclusive answers. She did not immediately accused WorldCom of manipulating its financial reports; rather she did a careful analysis of data to support her claim. The good thing about the ways of Cynthia Cooper is that she took into consideration the explanations of the executives involved in the case. And technically, such claim was evident. Sensibly, her actions could be somehow relevant to Rests four stages of moral development. He introduced the four key psychological components that must be developed for a person to be morally mature and correct. These were moral sensitivity, moral judgment, moral motivation, and moral character. These attributes would allow the person to be able to

recognize the issues at hand make careful and intelligent judgments, have the motivation to take action and the character to maintain good morality throughout the person's life. Realistically, this could be seen on the actions of Cynthia Cooper. She did not think twice ofletting the public know of the misuse of concepts of WorldCom. She was able to save the probable investors of the company from suffering a significant loss. Moreover, she did not use force nor did she take the advantage of blackmailing the company; rather, she took the corrective steps in order to uncover the truth behind the financial reports of the company and realistically present the financial performance and position of the firm. Although it has been of great risk on her part, she still took into consideration the interest of the public making her an ethical and moral individual, and most importantly - a reliable and just auditor.

3) What do you think motivated the behavior and actions of the following key people in the case: a. Max Bobbitt, chair of the audit committee
- He was keeping in mind the best interest of the company by asking the outside

auditor, KPMG, to investigate on the matter. He believes that this would give an unbiased and objective statement on the matter. b. Farrell Malone, the KPMG partner
- At first, Farrell recommended Cooper not to go at the audit committee at that time

maybe because they need to gather more evidence that there was indeed a fraud taking place. c. Scott Sullivan, the CFO
- Sullivan has unethically acted since he is the mastermind of the accounting

practice and even insisted Cooper to postpone the audit until theyll be able to cover the significant amount of expenses with relatively attractive revenue. As a Chief Financial Officer, he should have not hid the loss of the company. Evidently, such actions of Sullivan might be because he was protecting the life of the company and even his position. Of course, upon the sudden downfall of WorldCom, he will be losing his job and even stain his reputation. Thus, most companies would no longer be interested in providing him an opportunity to regain himself since a huge devastation was caused by his decisions. Simply, Sullivan was overpowered more by fears than morals. d. David Myers, the controller

- The actions of Myers would also be supported by the same reasons of those of

Sullivans. Clearly, he is protecting his job and he is avoiding for the downfall of the company. Thus, making him agree upon the malpractice of accounting standards. Simply, he is afraid of being jobless and he is just protecting his future and the future of the company even if it takes letting a lot of investors, both current and existing, suffer in the long-run. e. Betty Vinson and Troy Normand, members of the accounting department staff
- Both Vinson and Normand remained silent regarding the malpractice of accounting

standards of WorldCom for they are concerned with the probable things that might happen to them. Of course, if they will be revealing the truth behind the performance of WorldCom, then the executives will be forced to fire them leaving them jobless. Simply, both of them are worried of having no job since they will no longer have the money to support their dependents. Moreover, there is a clear possibility that they have been protecting the secret for so long because they dont want to get further involved with the issue. And technically, the executives gave them the assurance that everything would turn out okay making them worry less and just go with the flow on the recording and reporting of WorldComs fin ancial data.