WorldCom’s objective is to achieve the target line cost Expense-to-Revenue

WorldCom’s objective is to achieve the target line cost Expense-to-Revenue (E/R) ratio, as lower ratio represented a better performance and vice versa. To achieve the targeted performance, senior managers in WorldCom managed earning through accrual releases, and underreported line costs by capitalizing expenses.
In 1999 and 2000, Sullivan and Myers forced employees to release accruals that seem to be high relative to future cash payments. Releasing accrual turns out that fewer expenses are reported in the period. Provided that, $3.3 billion worth of accruals have been released, these left accruals below the amount need to be pay in the future period. In 2001, as there are few accruals were left to release, to maintain targeted E/R ratio, they choose to treat line cost as capital expenditure rather than operating cost. GAAP requires these costs to be recognized immediately, but by capitalize the expenses, the cost would slowly depreciate over a longer period of time. As a result, WorldCom had capitalized $544 millions of line costs, so that they can maintain their E/R ratio at 42% rather than 50% that it would have been without capitalization the expenses. These forms of creative accounting defer the recognition of expenses in one accounting period will be offset exactly by decreasing in profit in the subsequent period. This method could only merely defer the bad news.
Due to the economic recession and the aftermath of the dot-com bubble collapse, it causes the industry conditions began to deteriorate in 2000. The competition among existing company and new entrant were becoming more heightened given that WorldCom is forced to match their price to the lower prices offered by competitors, the company has become overcapacity, the reduced demand for telecommunications service, and the pressure to sustain the E/R ratio.
The corporate culture of employees should always obey the order from superiors is one of the main pressure to the senior managers. When the industry began to deteriorate, Ebbers pushed the senior management for promoting company’s performance (E/R ratio), which resulted in pressure to sustain the E/R ratio as any rises in E/R ratio would affect their share and credit rating. By sustaining the E/R ratio, this would ensure that shareholders and investors would keep on trusting the company and continue to keep their investment or inject more investment into WorldCom since others companies in the same industry are reporting losses but WorldCom is able to report profitable in the same period of time, this would boost the investors and shareholder’s confidence. Moreover, the employee benefits are based on the great company’s performance, if they want to secure their job in the company, they can only choose to obey the superior’s order, to manage the earning.