Worldcom Accounting Case Study

Because the telecom industry was doing well in the 90's, Ebbers became very rich as the value of WorldCom's stock climbed. However in the early 2000s the industry took a swing for the worst, earnings rejected, and WorldCom's stock began to fall. Ebbers quickly became "upside down" on his stock holdings and owed millions to the banks he borrowed money from. In a desperate attempt to prevent himself from going bankrupt, Ebbers and other company executives began fraudulently altering WorldCom's financial statements. Many people were hurt by the WorldCom fraud. Lots of honest, hard working line level WorldCom employees lost their jobs while losing the value of the stock in their WorldCom retirement savings accounts at the same time. Other investors who depended on WorldCom's false financial statements also lost what they invested. Nobody really benefited from the scandal, however it did give the executives a couple more years of glory and power before everything went

At the turn of the turn of the twenty-first century, a tide of corruption scandals involving reporting and accounting fraud with major US publicly-traded corporations generated a crisis of confidence in US financial markets. Major, apparently prosperous, companies like WorldCom, Sunbeam, Adelphia, and the infamous Enron engaged in accounting fraud of massive proportions to cover financial losses. These actions caused enormous outrage with the US electorate and infused the mistrust of market investors, situation that threatened to disrupt the process by which companies raise capital. Green (2004) concludes that it was adamant to restore public confidence in the capital markets by the end of 2002.

The stakeholders in this fraudulent case of WorldCom consist of Bernie Ebbers, Scott Sullivan, Buford Yates, David Myers, Cynthia Cooper, and Betty Vinson belong to the company. While the other stakeholders would consist of the creditors, Andersen (accounting firm), investors, and the public. This fraudulent act committed within WorldCom impacted every single stakeholder in a way. Either in a negative or positive way, most of the impact was caused with harm to everyone. The main individuals such as Ebbers, Sullivan, and Vinson all had major consequences as resulting with the fraud. Criminal trials were a major result with their fraudulent acts within WorldCom. Cooper was a lifesaver by most of the community. Aside from these individuals, the rest also got affected by the fraud. Investments conducted by the investors were all lost within the fraud process. The impact towards much of the image for Andersen was ruined. Many of the public lost their trust on the honesty and professionalism of Andersen and other certified public accounting firms. The entire employees from the top management to the smaller group of workers stayed unemployed and some with criminal punishment.

Deception, whether intentional or not, did occur. The shareholders had a right to know the financial state of WorldCom. In Ebber’s defense, he had unscrupulous bed fellows on this board. Their intentions are also at question especially regarding their eagerness to grant Mr. Ebbers a breathtaking loan for $341 million dollar at an interest rate of 2% to shield the instability of the company’s financial situation from shareholders. There were also some concerns whether such loans were ethical from the Security Exchange Commission Enforcement official Seth Taube. He stated that large loans to senior executives are commonly sweetheart deals involving interest rates that constitute a poor return on company assets. Federal prosecutors in New York cited Ebbers 's expensive lifestyle, and his overspending, as a motive to hide WorldCom 's mounting financial troubles. The impropriety associated with the largest loan any publicly traded company has lent to one of its officers in recent memory is evident. Unfortunately, if Ebbers had pressed the matter and sold his stock, he would have escaped the bankruptcy financially whole, but Ebbers honestly thought WorldCom would recover.”

Another corporate accounting scandal that occurred in the United States before the Sarbanes-Oxley Act came into effect was the WorldCom scandal in 2002. Seventeen thousand employees were fired and $3.8 billion dollars in profit were removed from their accounting books after an internal audit discovered improper expense accounting in 2001 and 2002. This improper accounting inflated the cash flow so the company would not report a net loss, only a net gain (Hancock, 2002).

In the summer of 2001, questions began to arise about the integrity of Houston energy company Enron’s financial statements. In December, they filed for bankruptcy as their fraud came to light and the United States government froze all of their assets and began prosecuting their executives and their external auditing firm Arthur Anderson (Franzel 2014). Enron was not the only company using accounting loopholes to mislead stockholders though; Global Crossing, Tyco, Aldephia, WorldCom, and Waste Management all underwent investigation for similar

He provided personal loans to key senior executives for that purpose. One former senior manager told the Financial Times that Ebbers offered $80,000 to $300,000 loans to as many as 50 top executives. These loans were not put in writing, but it was understood that they would be repaid. How the process of Fraud became? was accomplished in two main ways: First, WorldCom's accounting department underreported 'line costs Second, the company inflated revenues with bogus accounting entries from.

Bernard Ebbers was the CEO of Worldcom.WorldCom was the second largest telecommunications company in the US at the time.Ebbers made the business what it was.He also owned a motel chain.The company had been discussing a merger with Sprint.The merger was denied by the Department of Justice because they were nervous it would become a virtual monopoly.This dropped the stock price tremendously.Bernie Ebbers owned a whole lot of stocl from WorldCom.As the company started to go down banks demanded the Ebbers give them over $400 million in margin calls.Ebbers convinced WorldCom to give him the money so he could sell the substantial stock. WorldCom couldn’t pay expenses.They ended up with a $3.8 billion in expenses.This made the Department of Justice

On March 15, 2005 former CEO of WorldCom, Bernard Ebbers sat in a federal courtroom waiting for the verdict. As the former CEO of WorldCom, Ebbers was accused of being personally responsible for the financial destruction of the communications giant. An internal investigation had uncovered $11 billion dollars in fraudulent accounting practices. Later a second report in 2003 found that during Ebber’s 2001 tenure as CEO, the company had over-reported earnings and understated expenses by an astonishing $74.5 billion dollars (Martin, 2005, para 3). This report included the mismanagement of funds, unethical lending practices among its top executives, and false bookkeeping which led to loss of tens of thousands of its employees.

In a criminal lawsuit the Corporation can be sued, but the criminality falls to the bodies involved in the criminal activity at the company. Two significant criminal cases of criminal activities in this last century involved several executives, specifically the CEOs of Enron (2001) and MCI (2002) where criminal charges were brought against these leaders for fraudulent accounting practices. In Enron’s case $74 billion was lost in shareholder’s value, thousands of employee jobs, retirement accounts was lost and the company is no longer in existence. Two CEOS, Jeff Skilling and Ken Lay were convicted of 24 years of jail time. In the case of MCI/WorldCom, the company inflated profits by $11 billion, which resorted in $18 billion lost to investors, 30,000 jobs were lost. Bernie Ebbers MCI’s CEO was sentenced to 25 years in jail. These two criminal cases, created the greatest change in business regulations since 1930 and the Sarbanes-Oxley Act of 2002 (SOX) was put into place to protect investors from the possibility of fraudulent accounting activities by corporations. The SOX Act mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud.

WorldCom was the ultimate success story among telecommunications companies. Bernard Ebbers took the reigns as CEO in 1985 and turned the company into a highly profitable one, at least on the outside. In 2002, Ebbers resigned, WorldCom admitted fraud and the company declared bankruptcy (Noe, Hollenbeck, Gerhart, &Wright 2007). The company was at the heart of one of the biggest accounting frauds seen in the United States. The demise of this telecommunications monster can be accredited to many factors including their aggressive-defensive organizational culture based on power and the bullying tactics that they employed. However, this fiasco could have been prevented if WorldCom had designed a system of checks and balances that would have

P., & Coulter, M. K., 2012, p. 152), although it seems none of WorldCom’s executive management team seemed to feel this way. Many steps could have been taken to prevent the collapse of the WorldCom empire, but only a few key managers held the power and none were willing to take action. One control that did not exist in WorldCom’s culture was allowing both internal and external auditors access to all necessary documents and statements. Without full disclosure of these items no one could see how many risks the company was taking by making fraudulent entries against their books. Also the external audit team, Arthur Anderson, held WorldCom as one of its best customers which was a major conflict of interest. This relationship lead to many fundamental mistakes from Anderson not keeping pressure on WorldCom and getting all vital information that would prove how poorly the company was being run. Had they been operating transparently, auditors and employees would have seen the accounting deception and could potentially have stopped it prior to the company’s collapse. In addition, by employing multiple auditing firms many of the mistakes being made may have been caught and discontinued from the beginning.

WorldCom announced $3.8 billion in improperly booked expenses for 2001 and 2002, and an additional $3.3 billion in accounting errors. Moreover, WorldCom officially filed for bankruptcy when found an accounting fraud with the amount up to $11 billion. So how did it happen? As having mentioned, WorldCom’s CEO Bernard Ebbers was convicted of being guilty for the stock and accounting fraud, so it was obvious that the fraud occur from the management level of the company. WorldCom’s major operating expense was called line costs, which means cost paid to lease other telephone operators’ network, phone lines and so on. In short, just remember that line costs are its main operational expense. In 2000, WorldCom was actually not doing a good business, and they somehow tried to cover the current reality by performing some ‘magic’ with their accounting stuff, and here is the thing: WorldCom was managing to cover the truth behind its business, so according to his indictment, Mr. Scott Sullivan – former CFO – tried to move around the reserves for

In May, 2002, Cynthia Cooper, WorldCom 's internal auditor, discovered the treatment of line costs as capital expenditures. The internal auditor discussed the mistreatment with the CFO (chief financial officer), Scott D. Sullivan, and the company 's controller, David F. Myers. Prior to or on June the 12th, the matter was reported to the head of the audit committee of WorldCom’s board of directors, Max Bobbitt, who then asked the company 's current outside auditor, KPMG, to investigate. Prior to KPMG 's tenure as an outside auditor, Arthur Andersen had served as WorldCom 's outside auditor since 1989, but was later laid off, which KPMG then became the outside auditor on May 16,2002. Scott D. Sullivan, the financial officer, was put into question to justify the treatment, but was later dismissed on the day WorldCom made a public announcement which was on June the 25th. As at this date, the company’s controller, David F. Myers, resigned. Scott D. Sullivan did not consult with Arthur Andersen about classifying the line costs as capital expenditures, and Andersen commented that it was not notified of the classifications.

A multitude of choices made by executives at WorldCom led to the ultimate demise of the company as it was previously known, the employees and their livelihoods’, and the trust of the American people. In a time when corporations fail to set ethical standards and provide transparency to investors, how do we change corporate culture on a national level? By analyzing choices made to improve stock prices and company image that ultimately result in failure-- we can guide