Question

The WorldCom and Eron accounting scandal involved the firm classifying operating expenses as capital investments. Discuss...

The WorldCom and Eron accounting scandal involved the firm classifying operating expenses as capital investments. Discuss the impact on Eron and WorldCom’s operating cash flow and their overall cash position. Did the financial statements contain any clues that could have warned investors of the fraud ? Could the Eron debacle have been prevented ? What actions could have been taken by auditors, regulators, and lawmakers ?
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Answer :-

In the given case the operating expenses are classifying as capital invsetments.

The Inpact of this wrong treatment on the overall cash position is nothing as the mistake is only that the amount needs to show in investing activities but wrongly treat in operating activities. But due to this wrong entry the impact on operating cash flow is that the amount is deducted from operating expenses while needs to deduct from investing activities.

Yes , the financial statements contain clues that could have warned investors of the fraud . The clues is that if the capital expenditure is done then which of the fixed assets is increased.

No the Eron debacle have not been prevented.

The Actions that are taken by the auditor is that the qualified report is given on financial statements and also warned the employees.

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