I found this paragraph in WSJ online - I wonder if the IRS agrees with KPMG that this is NOT a capitalized expense after all? IRS demands you capitalize everything unless you can prove otherwise in order to minimize loss of current tax revenue. ANY comments from someone with TAX accounting background?
"WorldCom initially discovered the problems during an internal audit as the company's audit committee initiated their own investigation. Last week, one of WorldCom's internal auditors discovered that starting in early 2001, huge amounts of expenses related to building out their telecom system were not being treated as a regular cost but were being capitalized. That resulted in a significant boosting of the company's earnings before interest, taxes, depreciation and amoritization, otherwise known as Ebitda, which WorldCom used as a critical gauge of its growth.
Based on a preliminary investigation, WorldCom believes that its Ebitda was inflated to the tune of $3.6 billion and will have to significantly restate 2001 earnings. The committee turned its findings over to its new auditors at KPMG LLC, which WorldCom hired after firing Arthur Andersen LLC earlier this year.
KPMG agreed this wasn't correct and they confronted Mr. Sullivan, the chief financial officer and architect of many of the company's deals. Mr. Sullivan said that the reason he believed he could capitalize these expenses was because he felt there was no revenue from this, he could capitalize and then treat it as an expense once the business was generating revenue, he would treat it as an expense and run it through the income statement. The board forced Mr. Sullivan to resign and informed the SEC on Tuesday. |
