Firm Values. Referring back to the homebuilder examples used at
the beginning of the chapter, note that we suggested that
stockholders probably didn’t suffer as a result of the reported
loss. What do you think was the basis for our conclusion? In
June 2002, WorldCom, the telecommunications giant, surprised
investors when it announced that it had overstated net income in
the prior two years by $3.8 billion. At the center of the
controversy was Scott D. Sullivan, the former CFO. WorldCom had
leased telephone lines from local companies with the expectation
of reselling the use of the lines at a higher price. Under GAAP,
these costs should have been reported as an expense on the
income statement. Reportedly, however, Mr. Sullivan ordered that
the costs be treated as money spent to purchase a fixed asset,
so they were to be shown on the balance sheet as an asset and
subsequently depreciated.