Improper Expense

Capitalization
Additional Reading Material
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Copyright 2012 Deloitte Development LLC. All rights reserved.
Improper Capitalization of Expenses WorldCom
SEC complaint dated June 26, 2002 alleged:
WorldCom senior management approved and directed a scheme to
improperly capitalize its line costs
In 2001 and the first quarter of 2002, $3.9 billion worth of line costs
representing excess capacity were transferred from expense accounts
to asset accounts
Assets were depreciated over their estimated useful lives
WorldCom met analysts expectations because these current period
expenses were inappropriately deferred.
Line costs are fees paid to third-party telecom network providers for
access to networks, and were one of WorldComs major operating
expenses. Senior management improperly directed the transfer of these
expenses to asset accounts.

SOURCE: SEC v. WorldCom, Inc., June 26, 2002 (paras. 1-6)
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Copyright 2012 Deloitte Development LLC. All rights reserved.
Improper Capitalization of Expenses WorldCom
Results
Per the civil settlement, WorldCom agreed to pay $500 million in cash
and transfer common stock in the organized company worth $250
million
Prison
Bernard Ebbers former CEO
o Sentenced to 25 years in prison, the longest sentence ever for a
CEO found guilty of committing corporate crimes while running a
Fortune 500 company
Scott Sullivan former CFO
o Sentenced to five years in prison
Betty Vinson former Accountant
o Sentenced to five months in prison and five months house arrest

SOURCES: SEC Litigation Release 18219 and http://money.cnn.com/2005/07/ 13/news/newsmakers/ebbers_sentence/
Copyright 2011 Deloitte Development LLC. All rights reserved. 4 Footer
Copyright 2012 Deloitte Development LLC. All rights reserved.
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