This accrual method of accounting for capital expenditures does not apply to operating expenses such as materials, salaries, office supplies and the like.
In the example, the purchase of the cotton candy machine is a type of capital expenditure. How they did it: Investors were paid returns out of their own money or that of other investors rather than from profits.
Rather, the fraud occurred as a result of knowing misconduct directed by a few senior executives centered in its Clinton, Mississippi headquarters, and implemented by personnel in its financial and accounting departments in several locations. Many of the biggest corporate accounting scandals in history happened during that time.
Penalties: Lay died before serving time; Skilling got 24 years in prison.
The Board directed us to conduct a full and independent investigation of the accounting irregularities that gave rise to the announced intention to restate, and such other matters as we concluded should be considered, without any limitations.
The company went bankrupt, recording the largest bankruptcy in American history until the financial crisis of Ebbers sentenced to 25 years for fraud, conspiracy and filing false documents with regulators.
This also meant WorldCom's earnings might not meet Wall Street analysts' expectations. To hide its falling profitability, WorldCom inflated net income and cash flow by recording expenses as investments.