...371427 WorldCom, the United States second largest telecommunication company stunned the world by filing bankruptcy in July of 2002. The downfall of WorldCom did not just affect the employees, retailers, the government, but also the bankers. WorldCom was a multi-billion dollar telecommunications business that was founded in 1983. They started their business under the name ‘Long Distance Discount Services’ (LDDS) providing long distance telecommunication amenities. In 1985, Bernie Embers became the company’s CEO, in 1995; the company changed its name to WorldCom. Throughout the 1990’s, WorldCom increases its growth through series of successful acquisitions and mergers. Nevertheless in the late 1999, WorldCom’s performance begins to decrease in due to the upward of overcapacity, competition, and reduced demand for telecommunication services at the start of the economic recession and the result of the dot-com bubble downfall. All these burdens triggered WorldCom to become involved in accounting fraud and cook the books. WorldCom’s CFO Scoot Sullivan began the process of mismanaging as capital expenditure with what should have been normal expenses, therefore turning losses in profit, creating a camouflage that the company is carrying out well. Until June of 2002, things started to unravel and the company’s stock price plunged. Investigations were carried out and on June 25, WorldCom admits that it had inflated its earnings by $3.8 billion. After several investigations...
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...AVOIDING INVESTMENTS IN FRAUDULENT COMPANIES: THE WORLDCOM FRAUD Introduction The purpose of this report is to investigate and discuss the accounting fraud that occurred at WorldCom in order to recommend improved strategies to Berkshire Hathaway’s management for avoiding investments in companies with fraudulent financials. Accounting fraud is a crime committed by high level employees at an organization to manipulate the organization’s financial statements and intentionally disguise company performance. The fraud is committed without the knowledge of owners (shareholders and investors) to benefit the individuals perpetrating or committing the fraud and results in a negative impact on the owners. This report will give a brief background on WorldCom and the telecommunications industry, and then discuss the details of the WorldCom accounting fraud in order to provide relevant recommendations to Berkshire Hathaway, Inc. for mitigating future losses due to investing in fraudulent companies. We expect management to become more knowledgeable regarding high fraud risk investments and therefore make better informed investment decisions. Recommendations to Berkshire Hathaway include improving current risk assessment procedures and enhancing investment policies. WorldCom and the Telecommunications Industry WorldCom was the leader of the telecommunications industry during the 1990’s; in 2000, WorldCom was the 25th largest company in the world (Anderson, 2013, p. 48). The...
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...Final Paper: Case Study of WorldCom Financial Statement Fraud Introduction This paper will discuss the financial statement fraud committed by WorldCom by examining what led up to the fraud, who committed it and why, and the impact it caused on various stakeholders and the economy. WorldCom applied aggressive and undisclosed accounting tactics to provide financial statements that reflected a $10 billion profit for the years 2000 and 2001, rather than the actual combined loss of $73.7 billion that occurred (Romar, 2006). Opportunity, pressure, and rationalization were all present in this severe example of financial statement fraud which had a devastating impact on stakeholders globally. Basis for Understanding Financial Statement Fraud Prior to taking a deep dive into this specific example, it is important to first understand what constitutes financial statement fraud. Financial statement fraud can be defined as “deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users, particularly investors and creditors” (Wells, 2011, p. 299). Financial statement frauds can be broken down into five distinct categories: fictitious revenues, improper asset valuations, concealed liabilities and expenses, timing differences, and improper disclosures” (Wells, 2011, p. 292). The History of WorldCom “WorldCom began in Mississippi as a small provider of long distance telephone services” (Lyke, 2002). However, due to deregulation...
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...Case Assignment #1 – Accounting Fraud at WorldCom 1. Discuss the fraud at WorldCom in terms of the objective of financial reporting. How was the objective subverted by the actions taken by the managers of WorldCom? A. To begin, the primary objective of financial reporting for most companies is to provide useful information to capital providers. Essentially, the objective is “to assist in the efficient functioning of economies and the efficient allocation of resources in capital markets” (pg. 21, textbook). However, in the fraud case at WorldCom, WorldCom’s senior managers did not endorse this objective nor made any attempt to provide useful financial information to present and potential equity investors, lenders, and other creditors. Why? The senior managers subverted these objectives by focusing on revenue growth, seen as the key to increasing the company’s market value. Now although this focus is encouraged, WorldCom, as one manager says, “encouraged managers to spend whatever was necessary to bring revenue to the door, even if it meant that the long term costs of a project outweighed short term gains” (Accounting Fraud at WorldCom article, pg. 4). Therefore, CFO Sullivan and others subverted the objectives of providing useful information to external users by using accounting entries to achieve targeted performance. 2. The fraud at WorldCom revolved around two accounting irregularities: accrual releases and expense capitalization. a. Explain how these...
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...Accounting Fraud at WorldCom WorldCom grew rapidly in the 1980-90s through its various inorganic acquisitions – the resultant was a corporation with a hotchpotch of diverse and unaligned cultures. Exacerbating the situation, the Management (including the Board of Directors and CEO Ebbers) did little,if anything, to address the multiplicity of deontological and consequential ethics coexisting at WorldCom. CEO Ebbers in fact called an internal effort to create a corporate code of conduct a “colossal waste of time”. At WorldCom, the culture was also very much “top-down” – Managers gave instructions and employees were expected not to question their superiors. Any objections or challenges to senior managers are met with denigrating remarks or personal threats. The company also had a culture of compensating acquiescent employees generously, often beyond the company’s approved salary and bonus guideline. This further fueled a company culture of “do as told and be rewarded”. This was the institutional setting, which Betty Vinson was exposed to when she started working with WorldCom in 1996. In 2000, when Betty was asked to release the $828 millions of line accruals into the income statement, she herself recognized this as “not good accounting” practice. But after Yates (Director, General Accounting) replied that he himself was not happy with the transfer and that Myers (Controller) assured him that this was not going to happen again, she gave in to them. From a deontological...
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...Assignment # 3 WorldCom Accounting Fraud The purpose of this paper is to discuss the aspects of the WorldCom accounting scandal and the effects that this scandal had on the accounting world as we know it. We will discuss the corporate culture at WorldCom and how it contributed to the accounting fraud, how the CEO’s desire to be the #1 stock on Wall Street contributed to the fraud, pressures on accountants to book and release accruals to meet expectations, pros and cons of whistleblowing, and the creditability of the accounting profession when corporate fraud is revealed. First, we must look at WorldCom as a business standpoint. The driving factor behind this fraud was the business strategy of WorldCom's CEO, Bernie Ebbers. In the 1990s, Ebbers was clearly focused on achieving impressive growth through acquisitions. How was he going to pay for this acquisition binge? He paid for the acquisitions by using the stock of WorldCom. To accomplish this buying spree, the stock had to continually increase in value. "... WorldCom pursued scores of increasingly large acquisitions. The strategy reached its apex with WorldCom's acquisition in 1998 of MCI Communications, a company with more than two-and-a-half times the revenue of WorldCom. Ebbers' acquisition strategy largely came to an end by early 2000 when WorldCom was forced to abandon a proposed merger with Sprint (NYSE: S) because of antitrust objections ..." (Federal Bankruptcy Report, 2002) The fraud was accomplished...
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...Use the Fraud Triangle and Fraud Scale to critically analyse the actions of Bernie Ebbers and Scott Sullivan during the WorldCom saga/ What does your analysis suggest? Dennis Greer’s fraud triangle is a key framework in analysing the ‘factors that cause someone to commit occupational fraud’ (ACFE-The Fraud Triangle, Association of Certified Fraud, Examiners Available from:http://www.acfe.com/fraud-triangle.aspx [January 2014]). The three elements that make up the model are perceived pressure, perceived opportunity and rationalisation. In reference to the events of WorldCom, which has been labelled to date, ‘one of the biggest accounting scandals in history’ (CNN Money- WorldCom’s Financial Bomb, Available from:http://money.cnn.com/2002/06/25/news/worldcom/. [June 2002]) the initial pressures that were the driving force behind the actions of CEO, Bernie Ebbers and CFO Scott Sullivan are quite vast. Firstly Ebbers, was faced with the managerial strain of financial pressure on management due to the decline in the economic environment and the high expectations of Wall Street. As a result, he was aware that the key to growth was in acquisition and mergers, which required an illusion of a solid investment portfolio and therefore ‘a heavy dependence on the performance of WorldCom shares’ (Forbes- Bernie Ebbers Guilty, Available from: http:// www.forbes.com/2005/03/15/cx_da_0315ebbersguilty). In addition, Ebbers was fuelled by greed, ‘nearly a billionaire’...
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...Accounting Fraud at WorldCom 1) What are the pressures that lead executives and managers to “cook the books?” After the rapid evolution of the telecommunication industry in the 1990s, WorldCom shifted its strategy to focus on building revenues and acquiring capacity sufficient to handle expected growth. Their biggest goal was to be the No. 1 stock on Wall Street rather than capturing the market share. As a result, their Expense-to-Revenue (E/R) Ratio was their measurement for their main objective (increase revenues and become the No. 1 stock on Wall Street). Due to heightened competition, overcapacity and the reduced demand for telecommunication services at the onset of the economic recession and the aftermath of the dot-com bubble collapse, the telecommunication industry conditions began to deteriorate. Prices were falling and WorldCom had no option but to cut their prices as well. This action placed severe pressure on WorldCom’s most important measurement, the E/R ratio. The E/R ratio was being affected due to revenue and pricing pressures while the committed line cost was still the same. 2) Is there a boundary between earnings management and fraudulent reporting? If so, what is it? “Earnings Management is recognized as attempts by management to influence or manipulate reported earnings by using specific accounting methods (or changing methods), recognizing one-time non-recurring items, deferring or accelerating expense or revenue transactions, or using other...
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...Wor9 - 1 04 - 0 71 R EV: JU LY 2 6 , 2 00 4 RO BERT S. KAPLAN D A VI D KIR O N Accounting Fraud at WorldCom WorldCom could not have failed as a result of the actions of a limited number of individuals. Rather, there was a broad breakdown of the system of internal controls, corporate governance and individual responsibility, all of which worked together to create a culture in which few persons took responsibility until it was too late . — Richard Thornburgh, former U.S. attorney general1 On July 21, 2002, WorldCom Group, a telecommunications company with more than $30 billion in revenues, $104 billion in assets, and 60,000 employees, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Between 1999 and 2002, WorldCom had overstated its pretax income by at least $7 billion; a deliberate miscalculation that was, at the time, the largest in history. The company subsequently wrote down about $82 billion (more than 75%) of its reported assets.2 WorldCom’s stock, once valued at $180 billion, became nearly worthless. Seventeen thousand employees lost their jobs; many left the company with worthless retirement accounts. The company’s bankruptcy also jeopardized service to WorldCom’s 20 million retail customers and on government contracts affecting 80 million Social Security beneficiaries, air traffic control for the Federal Aviation Association, network management for the Department of Defense and long-distance services for both houses of Congress and the...
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...WorldCom Case Study Requirements 1. The paper must be a minimum of 5 pages in length with 1.5 inch spacing. There is no required font type but it must be legible. Font size cannot be less than 10 nor exceed 14. Use full sentences and avoid using bullet points within the paper. 2. Explain and answer the following questions: a. What are the pressures/forces that lead executives and managers to “cook the books?” b. What is the boundary between earnings smoothing or earnings management and fraudulent reporting? c. Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the types of action that occurred in World Com? d. Were the external auditors and board directors blameworthy in this case? Why or Why not? e. Betty Vinson: victim or villain? Should criminal fraud chargers have been brought against her? How should employees react when ordered by their employer to do something they do not believe in or feel uncomfortable doing? 3. Include a title page, bibliography, and work cited. f. The format for the title page is as follows: name of the assignment, student’s full names, class number and section, due date of the assignment, and the instructor’s name. g. The title page, bibliography, and work cited are excluded from the 5 page minimum requirement. h. Students may use either the APA or the MLA format. 4. The tentative deadline...
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...because of the slowing economy and additional competition from competitors. They believed that the company would not survive unless they changed the books numbers to look profitable because of a comment made by Ebbers. “Ebbers made a personal, emotional speech to senior staff about how he and other directors would lose everything if the company did not improve its performance.” p 4. 2. What is the boundary between earnings smoothing or earnings management and fraudulent reporting? To me there comes a line where you know that the entry that you are making is incorrect, and you make the entry anyways. That to me is where fraud is committed. Otherwise make your best judgement call on what would be appropriate to capitalize, or develop a new way of calculating estimates for accruals if you believe them to be wrong. 3. Why were the actions taken by WorldCom managers not detected earlier? There was no set of stated policies written in the company. The company most likely had around 30,000 employees in 1995, but didn’t have an employee code of conduct. Since this was not in place, every manager was able to act on their own accord. The accounting department sounded like a war room, where each group had to deceive the other of journal entries. The external auditor was stone walled during the audit, and simply stated the information was a moderate risk. The senior management team used scare tactics or “it’ll only be one time” tactic to coheres employees to making fraudulent entries...
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...世通公司财务舞弊案 世界通信公司成立于1983年，在不到20年的时间内，成为美国的第二大长途电信营运商（仅次于1877年成立的美国电报电话公司（AT&T），如果不是司法部在2001年否决了世界通信与斯普瑞特（Srint）公司的合并方案，他很可能成为美国电信业的龙头老大）。世界通信的成功应归功于其创始人本纳德·埃伯斯（Bernard J. Ebbers）在收购兼并方面的禀赋以及首席财务官司考特D·苏利文（Scott D. Sullivan）。从1983年成立至2001年，世界通信共完成了65项重大收购兼并。 2002年7月21申请破产保护前，世界通信是一个业务范围覆盖65个国家，拥有85000名员工、1000多亿美元资产、350多亿美元营业收入，为2000多万个人客户和数万家公司客户提供语音话务、数据传输和因特网服务的超大型跨国公司。 首先发现世界通信财务舞弊的是内部审计部的副总经理辛西亚·库伯（Cynthia Cooper），2002年末被评为《时代》杂志一年一度的新闻人物（此外，还有安然公司的雪伦·沃特金斯（Sherron Watkins）和联邦调查局的柯琳·罗莉（Coleen Rowley）） 2002年2月8日，世通降低了2002年度的收入和盈余预测，并计划在第二季度计提150至200亿元的无形资产减值准备；3月12日，SEC正式对世界通信的会计处理立案稽查；4月3日，世界通信宣布裁员10%（8500名）；4月30日，世界通信的创始人本纳德·埃伯斯（Bernard J. Ebbers）因卷入4.08亿美元贷款丑闻而辞去首席执行官职务；5月9日，穆迪斯(Moody, s)和菲奇(Fitch)等信用评级机构将世界通信债券的信用等级降至“垃圾债券”级别；6月5日，再次裁员20%（17000名）；6月20日，因资金周转紧张，推迟了优先股的股息支付；6月24日，世界通信的股价跌破一美元（1999年6元最高股价增达到64.50美元）。6月25日傍晚，上任不到两个月的首席执行官约翰·西择摩尔（John Sidgmore）宣布：内部审计发现，2001年度以及2002年第一季度，世界通信公司通过将支付给其他电信公司的线路和网络费用确认为资本性支出，在五个季度内低估期间费用、虚增利润38.52亿美元。世界通信的股票交易被纳斯达克紧急停牌三天，复排的第一个交易日，股价跌至0.06美元（前一日的股价跌至83美分）。许多美国主流媒体将世界通信的英文缩写“Word Com”改为“Word Con”（世界骗局），正在加拿大进行国事访问的布什总统公开表示震怒。6月26日，SEC以超乎寻常的速度向联邦法院递交了诉状，对世界通信提出证券欺诈指控，与此同时，美国司法部和国会宣布对世界通信的财务丑闻展开调查；7月21日，世界通信向美国破产法院纽约南区法庭申请破产保护，申报的资产总额高达1070亿美元，成为美国历史最大的破产案（据专家估计，资产的公允价值约为150亿美元，而世界通信的负债总额接近450亿美元，资不抵债约300亿美元）；7月31日，纳斯达克将世界通信的股票摘牌；8月1日，对财务丑闻负有不可推卸责任的世界通信前执行副总裁兼前首席财务官司考特D·苏利文（Scott D. Sullivan）以及前副总裁兼主计长大卫·迈耶斯（David F. Myers）被联邦调查局逮捕；8月8日，世界通信宣布1999年和2000年度的税前利润被高估了34.66亿美元；11月5日，再次披露又发现了20亿美元的虚假利润，至此，世界通信承...
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...of a dividend the employees get more stock. Then all of a sudden one March morning all these millionaire managers wake up to discover they are not only now worth just a few hundred bucks, but that their jobs were disappearing. This situation was a reality for many WorldCom workers, because on that March morning America’s largest fraud at the time had been reported. WorldCom was a publicly traded corporation established in 1983 to provide Long Distance Discount Services (LDDS) (Internet Services, 2011). Through the acquisition of other businesses Worldcom became the world’s second largest telecommunication company. LDDS began by leasing a wide-area telecommunications service (WATS) line and resold time to other businesses (Internet Services, 2011). WATS is a form of fixed-rate long distance telecommunication service in which certain area codes, such 800, 888, or 877, are reserved for businesses and when customers call these numbers they are not charged for long-distance but rather the business is charged as a subscriber of the WATS service (Rouse, 2006). Beginning in 1988, LDDS began growing through the acquisition of other companies such as Telephone Management Corp., National Telecommunications, IDB WorldCom, and WilTel Network Services (Internet Services, 2011). In 1989, LDDS went public through the acquisition of Advantage Companies Inc....
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...WorldCom Case Study Update 20061 by Edward J. Romar, University of Massachusetts-Boston, and Martin Calkins, University of Massachusetts-Boston In December 2005, two years after this case was written, the telecommunications industry consolidated further. Verizon Communications acquired MCI/WorldCom and SBC Communications acquired AT&T Corporation, which had been in business since the 19th Century. The acquisition of MCI/WorldCom was the direct result of the behavior of WorldCom's senior managers as documented above. While it can be argued that the demise of AT&T Corp. was not wholly attributable to WorldCom's behavior, AT&T Corp.'s decimation certainly was facilitated by the events surrounding WorldCom, since WorldCom was the benchmark long distance telephone and Internet communications service provider. Indeed, the ripple effect of WorldCom's demise goes far beyond one company and several senior managers. It had a profound effect on an entire industry. This postscript will update the WorldCom story by focusing on what happened to the company after it declared bankruptcy and before it was acquired by Verizon. The postscript also will relate subsequent important events in the telecommunications industry, the effect of WorldCom's problems on its competitors and labor market, and the impact WorldCom had on the lives of the key players associated with the fraud and its exposure. From Benchmark to Bankrupt Between July 2002 when WorldCom declared bankruptcy and April...
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...WorldCom history The history of WorldCom Company dates back in 1983 which started as a partnership between a former basketball coach Bernard Ebbers. This company was established at Mississippi as a coffee shop, which later developed to long distance Telephone Company. The company’s name initially was Long Distance Discount Service whose operations began on 1984. After several years in operation, the company became public in August 1989 with Bernard Ebbers as the company’s CEO (Moberg 4). Over the years, the company developed through mergers and acquisitions and becomes public in the year 1989. The notable merge which enabled the company to go public was the merger with the advantage companies Inc. This led to changing of the name from just LDDS to LDDS WorldCom in 1995 and to just WorldCom a year later (Moberg 4). In 1993, the company acquires long distance providers in the name of Resurgence Communications Group and Metromedia communications. This made history as the fourth largest long distance communication firm in United States. There were also several other mergers and acquisitions such as with IDB in 1994, WilTel in 1995, MFS communications in 1996, and the greatest merger which involved MCI communications. In 1998, WorldCom completed the merger with MCI at a cost estimated to be $40 billion. This was viewed as the greatest merger after brooks fiber properties and CompuServe which were valued at $ 1.2 and $ 1.3 billion respectively (Moberg 6). Another notable aspect...
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