Once again we have a finacial disaster that has tarnished the reputation of auditors. But, look at it this way....
When Worldcom began its adventure of creating a world wide fibre optic network a choice had to be made. Do you capitalise the expenses to create this network, or do you expense them as incurred?
I don't know the exact figures, so the numbers I am using are conservative estimates....
Let's assume the network in question was going to cost 10 billion dollars. Worldcom was going to spend that 10 billion dollars in order to capture 40% of the 100 billion dollar market...or 40 billion dollars.
So...do they show a loss of 10 billion dollars during the development stage, or do they capitalise the expenses until there is revenue to match against those expenses - a stalwart accounting principle. In my opinion the correct choice was made based upon the business plan, or model.
Unfortunately the assumption that there was a 100 billion dollar market availiable once the network was in place was incorrect. Turns out there is only a 2 billion dollar market and enough fibre optic cable to circle the earth a few times!
The auditors weren't wrong...the buisness plan was wrong. But the only way to know this at the time would be to have a crystal ball which could see into the future.
