29 Sep Read the following excerpt from a complaint filed
Read the following excerpt from a complaint filed by the Securities and Exchange Commission against WorldCom (posted online at http://www.sec.gov/litigation/complaints/comp17829.htm (Links to an external site.)).WorldComofficers and employees fraudulently made and caused the making of falseand fictitious entries in WorldCom’s general ledger which effectively“transferred” a significant portion of its line cost expenses to avariety of capital asset accounts, thereby effectively recharacterizing,without any supporting documentation, and in a manner inconsistent withGAAP, the operating expenses it had incurred for access to third partynetworks as “assets.”Post your answers to the following questions as aresponse to this post. Please give this some thought! I look forward tohearing your ideas and opinions on this case!When a companyincurs a cost, its accountants have to decide whether to record the costas an asset or expense. When costs are recorded as an asset, they aresaid to be capitalized. This builds on ideas first presented in Chapter 2,where you learned that it was appropriate to record costs as assets,provided that they possess certain characteristics. What are thosecharacteristics?Someauthors claim that even with clear rules like those referenced inquestion 1 above, accounting still allows managers to use “tricks” like capitalizing expenses. What do you suppose is meant by the expression “capitalizing expenses”?Supposethat, in the current year, a company inappropriately records a cost asan asset when it should be recorded as an expense. What is the effect ofthis accounting decision on the current year’s net income? What is theeffect of this accounting decision on the following year’s net income?Doyou think it is always easy and straightforward to determine whethercosts should be capitalized or expensed? Do you think it is always easyand straightforward to determine whether a manager is acting ethicallyor unethically? Give examples to illustrate your views.