...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 the Rise and Fall WorldCom began in 1983 during the breakup of AT&T, which enabled competitors to start selling long distance telephone service to individuals and business customers. A group of investors from Hattiesburg, Mississippi decided to start a communications company called Long Distance Discount Services (LDDS). The company lead by Bill Fields leased a local Bell System Wide-Area Telecommunications Service (WATS) line and resold time on the line to businesses. The sophisticated long distance technology was designed to handle a high volume of calls. The lines were leased at a fixed rate so the idea was that the more customers a company could obtain the lower cost for the company. Fields was able to sign 200 customers, however during this time the telecommunications industry was very competitive and when Bell starting raising the fixed lease rate on the lines LDDS was in trouble. By the end of the first quarter 1985 the company was losing approximately $25,000 a month. When Fields attempt to sell off the company was unsuccessful, one of the initial investors by the name of Bernard Ebbers agreed to become president and chief executive officer for LDDS, who at this time was 1.5 million dollars in debt. Ebbers, a Canadian, was a successful business owner in the hotel business. He came to the United States on a basketball scholarship to Mississippi College. Upon graduation Ebbers saw an opportunity in the motel industry and was able to borrow enough...
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...Mark Willis BUS 508 – Contemporary Bus November 15, 2013 Determine the most important five skills that a forensic accountant needs to possess and evaluate the need for each skill. Be sure to include discussion regarding the relationship between the skill and its application to business operations. As the annual price tag for fraud at American business soars to nearly $1 trillion, the demand for Certified Public Accountants that provide forensic accounting services has increased exponentially- a spike that appears in no danger of waning over the next several years. (Carlino, 2010) With the demand for forensic accounting services increasing, it is very beneficial for prospective employers and employees to know what skills are needed to fulfill the duties of this very important occupation in today’s society. “Forensic accounting encompasses collecting, analyzing, and evaluating evidence, and the interpreting and communicating the findings in courts, boardrooms or other venues.” (Carlino, 2010) There are numerous skills needed for these positions but five skills are vital in becoming am effective forensic accountant. The most essential skill needed to become an effective forensic accountant is included in the description of the position. One has to be very analytical in their profession in order to become efficient and effective. Being a problem solver in any business is a trait that no business wants lacking from their employees, but in the field of finance and...
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...in the telecommunications industry through the successful completion of 65 acquisitions. Between 1991 and 1997, WorldCom spent almost $60 billion in the acquisition of many of these companies and accumulated $41 billion in debt. Two of these acquisitions were particularly significant. The MFS Communications acquisition enabled WorldCom to obtain UUNet, a major supplier of Internet services to business, and MCI Communications gave WorldCom one of the largest providers of business and consumer telephone service. By 1997, WorldCom's stock had risen from pennies per share to over $60 a share. Through what appeared to be a prescient and successful business strategy at the height of the Internet boom, WorldCom became a darling of Wall Street. In the heady days of the technology bubble Wall Street took notice of WorldCom and its then visionary CEO, Bernie Ebbers (Moberg, Romar, 2003). Acquisition after acquisition led to started to warrant a suspicion into the dealings of the WorldCom organization. The company hit rock bottom when it declared bankruptcy after its merger with MCI. This is where the proverbial ball of yarn starts to come unraveled for the company. The company manipulated the account books and reported false gains and increases to continue to make it appear as a hot item on the stock market. In actuality the...
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...of WorldCom not only broke but with a personal net worth as a negative nine-digit number.2 No palace in a gated community, no stable of racehorses or multi-million dollar yacht to show for the telecommunications giant he created. Only debts and red ink--results some consider inevitable given his unflagging enthusiasm and entrepreneurial flair. There is no question that he did some pretty bad stuff, but he really wasn't like the corporate villains of his day: Andy Fastow of Enron, Dennis Koslowski of Tyco, or Gary Winnick of Global Crossing.3 Personally, Bernie is a hard guy not to like. In 1998 when Bernie was in the midst of acquiring the telecommunications firm MCI, Reverend Jesse Jackson, speaking at an all-black college near WorldCom's Mississippi headquarters, asked how Ebbers could afford $35 billion for MCI but hadn't donated funds to local black students. Businessman LeRoy Walker Jr., was in the audience at Jackson's speech, and afterwards set him straight. Ebbers had given over $1 million plus loads of information technology to that black college. "Bernie Ebbers," Walker reportedly told Jackson, "is my mentor."4 Rev. Jackson was won over, but who wouldn't be by this erstwhile milkman and bar bouncer who serves meals to the homeless at Frank's Famous Biscuits in downtown Jackson, Mississippi, and wears jeans, cowboy boots, and a funky...
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...collapse of WorldCom not only broke but with a personal net worth as a negative nine-digit number.2 No palace in a gated community, no stable of racehorses or multi-million dollar yacht to show for the telecommunications giant he created; only debts and red ink--results some consider inevitable given his unflagging enthusiasm and entrepreneurial flair. There is no question that he did some pretty bad stuff, but he really wasn't like the corporate villains of his day: Andy Fastow of Enron, Dennis Koslowski of Tyco, or Gary Winnick of Global Crossing.3 Personally, Bernie is a hard guy not to like. In 1998 when Bernie was in the midst of acquiring the telecommunications firm MCI, Reverend Jesse Jackson, speaking at an all-black college near WorldCom's Mississippi headquarters, asked how Ebbers could afford $35 billion for MCI but hadn't donated funds to local black students. Businessman LeRoy Walker Jr., was in the audience at Jackson's speech, and afterwards...
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...management and determine why their comeuppance was deserved. The two companies that I focus on in this section are Goldman Sachs company and WorldCom in the telecom world. Goldman Sachs was charged by the securities exchange commission, with fraud because the company developed and marketed an artificial collateralized debt system. Paulson & Co had the same invested and at stake with in the equity of ABACUS as believed by ACA. In circumstance, they did not have a concern in the success. By October. 24, 2007, the investors were defrauded by omitted facts or misstatements which led to downgrading of 83% of the RMBS in the ABACUS portfolio and 17 percent were on negative watch. (SEC Charges Goldman Sachs with Fraud concerning structuring and marketing of CDO Tied to Subprime Mortgages in 2010. Goldman established to pay $550 million in a settlement (Duggan, T. 2013). The vice president of Goldman was found liable for fraud too. The WorldCom scandal is another well-known unethical scandal. WorldCom submitted the largest bankruptcy filing in United States’ history after admitting improperly accounting for more than $3.8 billion dollars in expenses. The company used acquisitions to spurt large growth. Two of WorldCom’s acquisitions included MCI Communications and MFS Communications (UUNet). This caused WorldCom to appear more favorable on Wall Street, and many banks, brokers, and investors gave strong buy recommendations. This was not unethical; however, what investors and others...
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...Re.: “MCI Takeover Battle” Case Analysis Attached is an analysis of “The MCI Takeover Battle: Verizon versus Qwest” I. STRATEGIC PROFILE This case profiles MCI’s merger debate between Verizon and Qwest in 2005. At this time, many other companies are merging due to the industry consolidation, therefore forcing MCI to keep up with its competition. MCI was acquired after a bidding war between WorldCom, British Telecom and GTE, with the winning bid being a $37 billion offer from WorldCom. MCI-WorldCom then acquired many other communication companies excluding Sprint due to a U.S. Justice Department ruling. WorldCom operated throughout its filing of bankruptcy, resulting with MCI being not only the surviving company, but one of the most extensive networks in the world. After posting losses in 2004, MCI must undergo a strategic process in which to choose the better bid, Verizon or Qwest, in order to stay on top of the industry. II. SITUATION ANALYSIS Many general environmental trends are effecting Verizon, Qwest, and the communications industry as a whole. The always changing technological needs are shifting from landlines to wireless, where Verizon has seen about one in five people using their wireless phones as their primary forms of communication. However, Qwest is still generating a strong majority of its revenue from their wireline segment, and will therefore have to eventually undergo the process of shifting to wireless. Demographics also play a large role in the success...
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...–Auditing Video Case Fraud and Tone at the Top - Video Case Questions This video is an informative video made for accounting students and employees that outlines the danger of corruption and fraud in the workplace. The majority of the video is an interview with Walt Pavlo of MCI Worldcom. He explains his case and the steps that lead him to take the actions that landed him in prison. While he is telling his story two gentalmen describe how Walt’s story relates to the world of auditing as a whole and what steps a company and auditors need to take to avoid cases of fraud. 1. What were the three major fraud factors that led Walt Pavlo to commit fraud at MCI Worldcom? * Meeting Analysts’ Expectations * Compensation and Incentives * Pressure to reach goals 2. List five reasons employees don’t report unethical conduct. * No Corrective Action * Confidentiality of Reports * Retaliation by Superiors * Retaliation by Co-workers * Unsure whom to Contact 3. List the eight elements discussed in the video that lead to a negative work environment. * Not Rewarding Appropriate Behavior * Negative Feedback * Perceived Organizational Inequalities * Autocratic management * Low organizational loyalty * Unreasonable Goals and Expectations * Compensation * Promotional Opportunities * Organizational Responsibilities 4. List the seven steps management can take to help prevent fraud. * Ethical Tone...
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...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 2004 when it emerged from bankruptcy as MCI, company officials worked feverishly to restate the financials and reorganize the company. The new CEO Michael Capellas (formerly...
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...that the loans would avert the need for Ebbers to sell substantial amounts of his WorldCom stock, as his doing so would put further downward pressure in the stock's price. However, this strategy ultimately failed and Ebbers was ousted as CEO in April 2002 and replaced by John Sidgmore, former CEO of UUNet Technologies, Inc. Beginning modestly in mid-year 1999 and continuing at an accelerated pace through May 2002, the company (under the direction of Ebbers, Scott Sullivan (CFO), David Myers (Controller) and Buford "Buddy" Yates (Director of General Accounting)) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom’s stock. The fraud was accomplished primarily in two ways: Underreporting ‘line costs’ (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them. Inflating revenues with bogus accounting entries from "corporate unallocated revenue accounts". In 2002, a small team of internal auditors at...
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...Course: Date: ORGANIZATION OF WORLDCOM WorldCom is accredited as the United States giant in the world of business. The company started its operations under the name of Long Distance Discount Services Inc. (LDDS) back in 1983. Six years later, it merged with Advantage Companies Inc. thereby going public under the name of LDDS WorldCom. This was later transformed to WorldCom. The company experienced rapid growth through the 1990s and when it purchased MCI in 1998, it was approaching the top. There were plans by the management to have the largest merger by communications companies but the US department of justice and the European Union foresaw an eminent period of monopoly, they stopped the move. Some companies were therefore left out in the merger of 2000. The company however experienced the biggest bankruptcy and accountancy fraud in corporate history. WorldCom was compelled to change its name MCI, one of the companies it had purchased. On 14th February 2005, Verizons agreed to acquire MCI, formerly WorldCom. (http://www.usatoday.com/money/industries/telecom/2002-07-21-worldcom-chronology_x.htm) WorldCom since then has been operating under the banner of Verizon Business. The planning function of the management is guided by some key principles: The ethics principles ensure he privacy and security of customers’ data. At all levels transparency in financial accounting must be practiced to avoid another scandal. Innovation is another key area that makes the...
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...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 2004 when it emerged from bankruptcy as MCI, company officials worked feverishly to restate the financials and reorganize the company. The new CEO Michael Capellas (formerly...
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...in financial and accounting departments, at many levels of the Company and in different locations around the world—became aware in varying degrees of senior management’s misconduct. Had one or more of these individuals come forward earlier and raised their complaints with Human Resources, Internal Audit, the Law and Public Policy Department, Andersen, the Audit Committee, individual Directors and/or federal or state government regulators, perhaps the fraud would not have gone on for so long. Why didn’t they? The answer seems to lie partly in a culture emanating from corporate headquarters that emphasized making the numbers above all else; kept financial information hidden from those who needed to know; blindly trusted senior officers even in the face of evidence that they were acting improperly; discouraged dissent; and left few, if any, outlets through which employees believed they could safely raise their objections. This culture began at the top. Ebbers created the pressure that led to the fraud. He demanded the results he had promised, and he appeared to scorn the procedures (and people) that should have been a check on misreporting. When efforts were made to establish a corporate Code of Conduct, Ebbers reportedly described it as a “colossal waste of time.” He showed little respect for the role lawyers played with respect to corporate governance matters within the Company. While we have heard numerous accounts of Ebbers’ demand for results—on...
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...WorldCom took the telecom industry by storm when it began a frenzy of acquisitions in the 1990s. The low margins that the industry was accustomed to weren't enough for Bernie Ebbers, CEO of WorldCom. From 1995 until 2000, WorldCom purchased over sixty other telecom firms. In 1997 it bought MCI for $37 billion. WorldCom moved into Internet and data communications, handling 50 percent of all United States Internet traffic and 50 percent of all e-mails worldwide. By 2001, WorldCom owned one-third of all data cables in the United States. In addition, they were the second-largest long distance carrier in 1998 and 2002. How the Fraud Happened So what happened? In 1999, revenue growth slowed and the stock price began falling. WorldCom's expenses as a percentage of its total revenue increased because the growth rate of its earnings dropped. This also meant WorldCom's earnings might not meet Wall Street analysts' expectations. In an effort to increase revenue, WorldCom reduced the amount of money it held in reserve (to cover liabilities for the companies it had acquired) by $2.8 billion and moved this money into the revenue line of its financial statements. That wasn't enough to boost the earnings that Ebbers wanted. In 2000, WorldCom began classifying operating expenses as long-term capital investments. Hiding these expenses in this way gave them another $3.85 billion. These newly classified assets were expenses that WorldCom paid to lease phone network lines from other companies to...
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