Long Distance Discount Services ( Ldds )

1460 Words6 Pages
1. Introduction Worldcom Group, formally known as Long Distance Discount Services (LDDS) and the second largest long distance telecommunications provider in the U.S., was involved in one of the biggest accounting frauds in history. The scandal, when unearthed in 2002, revealed that Worldcom had overstated it’s earnings in the five quarters between 2001 and 2002 by more than 3.8 billion. This was a result of inappropriate accrual releases and classifying periodic line costs as capital expenditures rather than treating them as operating expenses (Lyke and Jickling 2002). This report examines and analyses the underlying reasons behind how and why such a massive fraud took place, how it went unnoticed through the years and the actions taken…show more content…
However, evidence has also been found of managers trying to influence analysts’ expectations downwards (Degeorge et al 1999). According to Burgstahler and Dichev (1997), when earnings increases are consistent firms’ price-to-earnings are normally higher but when the trend is broken firms experience a negative growth in stock returns. 2.1.2 Compensation agreements and Equity incentives Since the last couple of decades, it has become very common for companies to link CEO and executive pay to the stock prices of the firms. Companies try and use this strategy in order to align the incentives of senior management with shareholder interests. But, it has been found that this strategy might backlash and instead motivate managers to practice fraudulent methods in order to manage and increase the company’s reported earnings (Bergstresser and Philippon 2006). 3. Earnings Management at Worldcom (Q1B) Worldcom CEO Bernie Ebbers was instrumental in merging 75 companies with Worldcom including telecommunication giant MCI. But in reality, Worldcom was struggling to make these acquisitions work while it continued to pursue growth by trying to acquire more companies (Zekany et al 2004). In addition to this, there was increasing pressure to maintain the E/R ratio at 42% and this ratio was difficult to maintain as the industry was facing slow growth due to competition, excess capacity and reduced demand (Kiron and Kaplan 2004). Therefore, senior
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