Group 8 47A Group Presentation October 18, 2012 WorldCom Group 8 Fadhil Ghalib Agam Reyza Hamida Praja

raja Muhammad Fadhil Adinugroho Cut Anggun Venina Ayuni Maulidya

Cut Anggun : Good morning we are group 8; Ayuni, Reyza, Fadhil and Fadhil. WorldCom is a public company telecommunications which provides a broad range of communications sevices. WorldCom did some fraud...also improper and misleading public statements relating to the financial condition of WorldCom...intended to meet wall street expectations. In this case the one responsible are Ebbers and several WorldCom senior officers, one of whom is Scott Sullivan. They want to avoid the falling price of WorldCom stock. Fadhil Adinugroho : The public company publish balance sheet and the second is the income statement,...expenses can be classified as operating expenses and the second is capital expenditures...usually according to GAAP, the operating expenses will be...as an operating expense. The second is the capital...not recorded in the income statement but...line cost expense is a term lease...to use third party network...the payment for future...account called reserve...prepared for the line cost. His own words. Ayuni : In 2000 their net income keeps decreasing...and because of that increasing in operating expense, WorldCom did the fraud, they tried to decrease their operating expenses by concealing their line cost expense. So in third quarter of 2000, they did the fraud by reducing their line cost expense and various reserve account...they did the fraud in the fourth quarter of 2000. But they cannot be used, they cannot use the reserve anymore... Reyza : The second method of the WorldCom fraud. Because they could not draw down the reserve account, they...by reducing the line cost expense and reporting it as capital asset. This expense is the expense WorldCom must...happen in the first quarter of 2001 until the...in April 2001 WorldCom did some improper entries...and corespondingly increasing WorldCom capital asset...the result for this fraud is...become overstated and the line cost expense become understated... WorldCom made several changes to accounting for line cost expenses. He did not read from a script. Fadhil Ghalib : From the previous... he is reading...the assets become overstated, and the line cost expense become understated. The CEO accused...and be in prison...the CFO are also charged...he could not work anymore...and he cannot be an officer or director. After that WorldCom become bankrupt and required to pay monetary penalty... Fadhil Ghalib what was the initial journal entry for the reserve, and what was the journal entry to draw down on the reserve? Dr. Line cost expense Cr. Reserve estimated amount Dr. Reserve Cr. Cash actual amount. From the remaining amount of the reserve in the previous quarter they draw down the amount...so how did they draw down on the reserve? So that is your t account, now give me the journal entry. Dr. Reserve 2235 Cr. Line cost expense 1235 Cr. Cash 1000. Fadhil Adinugroho why couldnt they just...they cannot terminate the contract because it was a long term contract...it will be a penalty...it will be another cost...and according to the agreement, even though they dont use the service they must pay a full year. So why their contract so huge? Because there is a growth in telecom service, to expand... Reyza you mentioned capital asset, what did you mean by that? WorldCom made a lot of leasing agreement, but actually it was operating lease...but you are digressing because we are not talking about

leasing, but rather about line cost expense...can you tell me... this was equipment...actually WorldCom must lease the third party network to serve their customer...it should be rental expense but they recognize it as lease equipment under finance leases. Ayuni: They had line cost expense Dr. They want to record only so the rest of...they record as capitalized as lease equipment under financial lease...which is an asset. Dr. Line cost expense Cr. Reserve 4108 Dr. Leased equipment under finance lease Cr. Reserve 771. Cut Anggun what happens to the statement of cash flow? By putting it as a capital asset, what happens to the statement of cash flow? They should recognize operating expense and then they change to capitalized the expense become asset...net income is overstated...What happens to cash flow from investing activities? Overstated. Sorry...understated. Because they spend money to buy new asset. Fadhil Ghalib : the asset increase. The company look good because the company have enough money to invest... I mean in the public they look profitable... but we are not talking about profit...because they have so much asset so the value of the company increase... Fadhil Adinugroho : They have more asset in the company...but the cash from investing the condition...it make the company look bad because they do not have any cash left. But they have cash from operations...if the operating cash did not have enough amount to cover the investment...they still have positive cash so they cash on hand from operating... Reyza : In the statement of cash flow from operations become overstated because the operating expense become investing asset so the operating expense become understated...the operating cash flow become overstated, and the investing cash flow become understated...so does it make company look good or look bad? As long as the net cash flow meet the cash flow from investing activities, the net from operating activities become lower because...but if the cash from operating activities. So the company looks like does not have money any more. Cut Anggun what else did they do? They did...issuance of new stock...they want to issue new stock based on manipulating information...net worth... Fadhil Adinugroho : If the company net worth are increasing it will make the company look more valuable stock price to increase, the company issue new stock...asset...they issue for the equity to cover the range between asset and liabilities. They issued new shares to do what? To get cash flow positive... Reyza : I think the indictment sell all of his shares because the one behind the manipulation was Ebbers...before or after the manipulation?...he sell his shares...after the manipulation because Ebbers knows about the effect of the manipulation, he sells his shares discreetly...to avoid the effect of the stock drop. Reyza, Fadhil and Fadhil wore ties, while Ayuni and Cut Anggun had a red color theme to their outfits; although this was not a determining factor in my score-keeping, it was nice to see them dressed nicely. An Austrian national was sitting in the audience to assess a posible enrollment into our MBA program. Thanks to the teams delivery of their material, most notably Fadhil Adinugrohos explan ation about the function of the income statement and the balance sheet vis-a-vis company performance, as well as Reyzas role as the groups major resource person, I would like to think that our guest came away with a better appreciation of how accounting works. Great job. Final score : 80 out of a possible 80 Nani