Through managerial accounting, organizations receive the information they need so that they can plan, make decisions, and oversee business processes. Although an organization’s accounting statements (both internal and external) should fully and transparently reflect the organization’s actual financial situation, sometimes they do not. Sometimes there is intentional deception or fraud. Yet, even when an organization uses legal and accepted accounting practices, accounting statements may fail to present risks or explain unusual costs, profits, or assumptions. In this Discussion, you will consider your professional experience to recommend ways to ensure ethical responsibility within an organization.
Think about a time in your professional experience when a decision was made based on inaccurate accounting information or unethical behavior resulting in fraudulent information. If you do not have professional experience directly related to accounting and decision making, research a situation in which inaccurate or fraudulent accounting information was provided by a company. Consider the outcomes of utilizing fraudulent accounting information for decision making and research how to avoid such situations.
Post your proposed recommendations for ensuring ethical responsibility within an organization, to include the following:
Describe the situation from either your professional experience or your research in which unethical or fraudulent behavior occurred. If you are describing an example from experience, please do not report real names of either the company or individuals. If you are using an example from research, you must include the reference and citation of the source.
As a manager, explain the steps you would have taken or did take to address the described unethical behavior. What methods or techniques could have been used to both detect and mitigate the described situation?
As a manager, propose what actions you could take to help prevent situations of unethical or fraudulent behavior in managerial accounting.
Operating Expenses (Correct Treatment): Line costs should have been immediately expensed on the income statement, reducing current-period profit.
Capital Expenditures (Fraudulent Treatment): By treating them as capital expenditures, the costs were improperly recorded as assets on the balance sheet and were expensed gradually over many years through depreciation.
The Outcome: This deception artificially inflated profits by billions of dollars, enabling the company to meet Wall Street earnings expectations and maintain a high stock price. When the fraud was uncovered, WorldCom filed for bankruptcy in 2002, leading to immense financial losses for investors, the destruction of thousands of jobs, and criminal convictions for key executives.
2. Managerial Steps to Address the Unethical Behavior
If I were a manager who became aware of this fraudulent behavior—like internal audit head Cynthia Cooper—my immediate steps would focus on detection, cessation, and escalation.
Detection and Mitigation Methods
Immediate Independent Investigation and Documentation:
Action: Immediately halt the practice of capitalizing line costs and launch an internal investigation, engaging an independent external forensic accounting team if necessary.
Method: Document all accounting entries related to "prepaid capacity" (the term WorldCom used to mask the capitalization), identifying who authorized and processed them. I would utilize variance analysis to compare the ratio of line costs to revenue with industry benchmarks and prior periods. An aggressive, unexplained drop in this ratio is a major red flag (as it signals costs are being moved off the income statement).
Protecting Whistleblowers and Escalation:
Action: Secure the safety and employment of any employees who brought the initial concern forward (like Kim Emigh and the internal audit staff). I would bypass the CFO and immediately escalate the findings to the Board of Directors' Audit Committee.
Sample Answer
Recommendations for Ethical Responsibility in Managerial Accounting: WorldCom Case Study
1. Description of Unethical or Fraudulent Behavior
The situation I will describe is the massive accounting fraud that occurred at WorldCom in the early 2000s, which remains one of the largest corporate frauds in history.
The Fraud: WorldCom executives, led by CEO Bernard Ebbers and CFO Scott Sullivan, engaged in a scheme to grossly inflate the company's net income and portray a healthy financial picture despite plummeting revenues. The primary method used was the improper classification of expenses. Specifically, WorldCom reclassified billions of dollars in line costs (fees paid to other telecommunications companies for network access) as capital expenditures rather than operating expenses.