Your assignment
Role: Senior accountant preparing a restatement-scoping memo for a telecommunications company's controller
Deliverable: A restatement-scoping memo with journal-entry mechanics, statement-effect timeline, source-qualified claim ledger, control failures, and evidence requests.
Evidence basis: public records
Evaluation criteria
- accounting mechanics (30%): Explains the initial asset-versus-expense effect and the later depreciation, asset, income, and cash-flow consequences without implying that cash changed.
- claim and evidence chain (25%): Links each allegation to source language and identifies records needed to test service benefit, authorization, coding, and management override.
- period and scope reasoning (25%): Defines affected periods, distinguishes correction from ordinary estimate revision, and avoids unsupported restatement amounts.
- control recommendations (20%): Proposes controls responsive to the alleged mechanism rather than generic ethics slogans.
Your role and decision
A controller discovers large manual entries moving network “line costs” from expense accounts into property accounts. Management says capitalization merely smooths a temporary downturn. You must explain what the entries do, what evidence would be required for an asset, and how to scope a correction.
Evidence packet
Use the SEC complaint concerning WorldCom. It is a litigation document stating the Commission's allegations. Record exact locators for assertions about the nature, timing, authorization, and size of entries, but do not extend those assertions beyond the periods and accounts described.
Required work
- Show the generic entry for expensing a $100 service cost and the alleged capitalization alternative. Trace both through current-period expense, income, assets, later depreciation, operating cash flow, and investing cash flow classification.
- Explain why a debit to an asset account is not evidence that an asset exists. List the contracts, invoices, service periods, useful-life evidence, and approvals needed to evaluate recognition.
- Build a period-by-period effect matrix. Include the reversal or depreciation consequences that make the distortion a timing pattern, not free income.
- Identify controls over manual journal entries, account coding, capitalization policy, close analytics, and management override that directly address the alleged mechanism.
Constraints
Do not invent a complete restatement from complaint excerpts. Distinguish allegation, later history, and your accounting inference. Do not describe the entry as creating cash or economic resources merely because reported assets and income increase.
Evaluation
A strong memo follows one transaction from evidence to entry to statements to later periods, then explains how a reviewer could detect or prevent the same mechanism.