WorldCom Fraud Centered on Connection Costs

The accounting fraud at WorldCom(WCOM Quote) amounted to a decision by its ousted chief financial officer to categorize as long-term investments money paid to local phone companies to complete calls.

At the beginning of 2001, Scott Sullivan, who lost his job when the $3.8 billion scandal came to light this week, took that fateful decision after discovering that at least 15% of these connection agreements weren't producing revenue, The Wall Street Journal reported Thursday. Sullivan decided to capitalize the so-called "line costs" as long-term investments to be written down over time, hoping the agreements would start producing revenue later, the newspaper reported.

WorldCom shook corporate America Tuesday night by announcing it would be forced to restate five quarters of earnings statements to reclassify the expenses as routine costs. The revelation sent its stock down to pennies a share before it was halted by Nasdaq and prompted the Securities and Exchange Commission to file criminal charges against the former highflier. ...