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ACCOUNTING FRAUD
In 1999 and 2000, WorldCom reduced its reported line costs by approximately $3.3 billion.
This was accomplished by improperly releasing accruals, or amounts set aside on
WorldComs financial statements to pay anticipated bills. These accruals were supposed to
reflect estimates of the costs associated with the use of lines and other facilities of outside
vendors, for which WorldCom had not yet paid. Releasing an accrual is proper when it turns
out that less is needed to pay the bills than had been anticipated. It has the effect of providing
an offset against reported line costs in the period when the accrual is released. Thus, it reduces
reported expenses and increases reported pre-tax income.
WorldCom manipulated the process of adjusting accruals in three ways. First, in some
cases accruals were released without any apparent analysis of whether the Company actually
had an excess accrual in the account. Thus, reported line costs were reduced (and pre-tax
income increased) without any proper basis. Second, even when WorldCom had excess
accruals, the Company often did not release them in the period in which they were identified.
Instead, certain line cost accruals were kept as rainy day funds and released to improve
reported results when managers felt this was needed. Third, WorldCom reduced reported line
costs by releasing accruals that had been established for other purposes. This reduction of line
costs was inappropriate because such accruals, to the extent determined to be in excess of
requirements, should have been released against the relevant expense when such excess
arose, not recharacterized as a reduction of line costs.
Further, WorldCom reported on its Consolidated Statement of Operations contained in its Form
10-Q for the first quarter of 2002 that its line costs for that quarter totaled $3.479 billion, and that
its income before income taxes and minority interests totaled $240 million, whereas, in truth and
in fact, WorldCom's line costs for that period totaled approximately $4.276 billion and it suffered
a loss of approximately $557 million.