...Daniels Fund Ethics Initiative University of New Mexico http://danielsethics.mgt.unm.edu WorldCom’s Bankruptcy Crisis INTRODUCTION The story of WorldCom began in 1983 when businessmen Murray Waldron and William Rector sketched out a plan to create a long-distance telephone service provider on a napkin in a coffee shop in Hattiesburg, Miss. Their new company, Long Distance Discount Service (LDDS), began operating as a long distance reseller in 1984. Early investor Bernard Ebbers was named CEO the following year. Through acquisitions and mergers, LDDS grew quickly over the next 15 years. The company changed its name to WorldCom, achieved a worldwide presence, acquired telecommunications giant MCI, and eventually expanded beyond long distance service to offer the whole range of telecommunications services. WorldCom became the second-largest long-distance telephone company in America, and the firm seemed poised to become one of the largest telecommunications corporations in the world. Instead, it became the largest bankruptcy filing in U.S. history at the time and another name on a long list of those disgraced by the accounting scandals of the early 21st century. ACCOUNTING FRAUD AND ITS CONSEQUENCES Unfortunately for thousands of employees and shareholders, WorldCom used questionable accounting practices and improperly recorded $3.8 billion in capital expenditures, which boosted cash flows and profit over all four quarters in 2001 as well as the first quarter of 2002. This disguised...
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...Justin Gardner ACCT 4456 Auditing WorldCom Case WorldCom Case Cynthia Cooper was the former Vice President of Internal Audit at WorldCom. Cynthia is widely known as the whistleblower that discovered the fraud that was occurring in 2002. The CFO at the time was having the corporate accounting team capitalize billions of dollars of network leases instead of expensing them as they should have. This let the company report a profit of $2.4 billion instead of a loss of $662 million. This all occurred before the Sarbanes-Oxley reforms had been enacted. If this law had been in place when the WorldCom fraud happened, I think it could have been prevented. The sections of this act that I researched were sections dealing with whistleblowers and requiring companies to have a code of ethics for their CFO. I think that if WorldCom had a code of ethics for its CFO at this time it could have prevented him from making questionable decisions about how to account for the network leases. Perhaps he would have been more conservative. The whistleblower portion would have made it easier for Cynthia to report the fraud. She wouldn’t have had to worry about getting so much push back from her superiors and could have exposed it sooner. Perhaps they would have even had a whistleblower hotline so she wouldn’t have needed to even speak with the CFO. A challenge faced by the business and accounting profession that is highlighted by this case is the problem of how to implement an effective corporate whistleblower...
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...pressures that lead executives and managers to "cook the books?" In the 1990’s WorldCom was a growing and successful telecommunications company, involved in may acquisitions, and had made some ‘Mega Deals” in the telecommunications industry. The Company was becoming very profitable, but in 1999 revenue growth had stopped causing the price of stock to fall. This was due to the down turn in telecommunications industry, an increase in competition, the overcapacity in the telecommunications market, the effects from the dot com bubble collapse, and the onset of the economic recession. This major loss in revenue, current market conditions, and a large amount of liabilities from all the companies they had been acquiring led WorldCom to their involvement in accounting fraud. 2. What is the boundary between earnings smoothing or earning management and fraudulent reporting? The boundary between income smoothing and fraudulent reporting seems to be more of a blurred line than a distinct one. Both actions will inhibit investors and creditors from making accurate and informed decisions. Investors and creditors rely on the company’s financial information to be consistent and reliable in order to achieve projected results. I think engaging in earning management or fraudulent reporting would result in the same misleading of information, and thus both should be avoided. 3. Were the actions taken by WorldCom managers not detected earlier? What process or systems should be in place to...
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...With the help of Mr Sullivan's financial engineering Mr Ebbers raced the business - now called WorldCom - through 70 deals in four years, buying up competitors and expanding his reach. Along the way the company picked up numerous fans on Wall Street, perhaps most notably Jack Grubman, a telecoms analyst at the prestigious investment bank Salomon Smith Barney. Like many analysts of the time, Mr Grubman believed that to succeed in the new era of the internet and the world wide web companies needed to create telecoms networks that spanned the globe - a goal that could only be achieved with serious financial backing. Mr Ebbers had no trouble finding people willing to give him a hand. Usually sober bankers and investment analysts were entranced by his plain-speaking manner and as the company grew its share price defied gravity. Using its valuable shares as bargaining chips and backed up by piles of debt, Mr Ebbers snatched up businesses across the US and waded into Europe. Its acquisitions included UUNet, one of the oldest carriers of internet traffic, which is still a major provider to AOL. WorldCom also sealed what at the time was the biggest deal the US stock market had seen, snatching another US communications group, MCI, from the clutches of BT. That $40bn merger in 1998 gave WorldCom an effective stranglehold on the US internet market, forcing the sale of part of MCI to another British firm, Cable & Wireless. In the deal C&W picked up a piece of internet history...
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...Chad Ducharme Macroeconomics What do Enron, Tyco, and World-com have in common Intro The purpose of this work is to show you what happens when you try to cheat the system. the reason the government does audits and checks for so many frauds is because people nowadays will do whatever it takes to make a little extra money. What these companies did not only hurt themselves in the long run but hurt the millions of workers and families that were connected with them. The Companies Enron was formed in 1985 by two gas companies, Houston Natural Gas and Nebraska InterNorth.Enron incurred massive debt and, as the result of deregulation, no longer had exclusive rights to its pipelines. In order to survive, the company had to come up with a new and innovative business strategy to generate profits and cash flow. To try to fix this Enron came up with the idea of becoming a “gas bank” to try to fix its problems. They would buy gas from a network of suppliers and sell it to a network of consumers, contractually guaranteeing both the supply and the price, charging fees for the transactions and assuming the associated risks. This became so successful that they decided to apply this to other things instead of just gas like, coal, paper, steel, water and even weather. In 2001 CEO Kenneth Lay retired and named Jeffrey Skilling president and CEO of Enron. On October 16th 2001 They reported their first quarterly loss in over four years and went downhill until the company filed for bankruptcy...
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...a- i) According to SCON 6 article 25, assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Assets has three characteristics: it embodies a probable future benefit that involves a capacity or in combination with other assets, to contribute directly or indirectly to future net cash inflows, a particular entity can obtain the benefit and control others’ access to it and the transaction or other event giving rise to the entity’s right to or control of the benefit has already occurred. Future economic benefit is the essence of an asset (paragraphs 27–31). An asset has the capacity to serve the entity by being exchanged for something else of value to the entity, by being used to produce something of value to the entity, or by being used to settle its liabilities. Expenses are outflows or other using up of assets or incurrence of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations. Expenses are actual or expected cash outflows that have occurred of will occur as a result of the entity’s central operations. Cost of the goods sold, interest, rent, salaries, depreciation may be given as examples. ii) Costs should be expensed when they have expired or used up and when they have no future economic value. They should be capitalized as assets when costs have not expired...
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...1. What are the pressures that lead executives and managers to “cook the books”? There were many pressures that lead managers at World Com to “cook the books”. They all stemmed for the need to reach their goal to be the No. 1 stock on Wall Street, even while the company wasn’t doing very well. Being No. 1 on Wall Street meant they focused on revenue growth which would increase their company’s market value. World Com started facing struggles as, “Industry conditions began to deteriorate in 2000 due to heightened competition, overcapacity, and reduced demand for telecommunications services]”. This forced World Com to reduce prices in order to match their compeititors affecting the E/R ratio. Ebbers pressured senior staff to improve its performance or they would lose everything. The CFO, Sullivan, formulated a plan to use accounting entries to achieve targeted performance and persuaded and coaxed many others to go along with the plan in order to stay on top. 2. What is the boundary between earnings smoothing or earning management and fraudulent reporting? The boundary between earnings management and fraudulent reporting can overlap at times. Earning management is defined as the use of accounting techniques to produce financial reports that may paint an overly positive picture of a company's business activities and financial position. Earnings management takes advantage of how accounting rules can be applied and are legitimately flexible when companies can incur expenses...
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...Financial Reporting I Isgandar ALizada March 14, 2016 1. Conceptual Framework is a practical tool for describing objectives and concepts for general purpose in financial reporting. It has several functions. First, based on consistent concepts, assistance for the board to develop IFRS standards. Second, in absence of IFRS standards, helps to develop accounting policies. Moreover, help others to understand the standards. Providing complete, clear and updated set of concepts is its main objective. From perspective of completeness, in our case, because company officials didn’t record operations properly for the sake of playing with ratios. Also, playing with their assets-expenses statements they simply couldn’t keep it long and auditors could catch because it was not clear how this company made profits but others had great loses. Last but not the least, all the financial statements should be organized in time bases and should be updated day-to-day activities. As wrong statements by officials on purpose made it not comparable to previous years. 2. Company officials who are in charge of judgments in financial documents, are decision free and can finalize their thought in different ways. As humans we are keen to make mistakes unintentionally. Nevertheless, some people misuse their power, intentionally. By preparing ratios before the financial reports was not usual and by playing in entries they “successfully” showed that unless other companies, they didn’t face decline in the market...
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...WorldCom is one of the biggest scandals that happen in the world, especially in the United States of America. WorldCom merged with MCI in 1997 for US$37 billion to form MCI WorldCom. Later on WorldCom wanted to merge with Sprint Corporation in 1999 becoming a $129 billion merge, but before the two companies finalized the US department of Justice and the European Union stepped in and didn’t want this to happen, for this merge had the possibility of creating a monopoly. Bernard Ebbers was the CEO of WorldCom at the time, he became very wealth with WorldCom common stock. Without the merge of Sprint, WorldCom Stock started to decrease over time, and the banks were pressuring Ebbers and he had to cover margin calls on his WorldCom stock that was used to finance other business like (timber, yachting.) From 1999 through 2002 Scott Sullivan (CFO), David Myers (Controller) and Buford Yates (Director of General Accounting) were using shady accounting methods to show the company profitability and financial growth when company was losing shares. The company was capitalizing there expenses when they should have been expensing them, making the balance sheet look better than what it really is. The second issue for the company was making fake accounting entries to make them look like they generated revenues from corporate unallocated revenue accounts. WorldCom had approximately $3.8 billion in fraud of June 2002. For unethical practices WorldCom was capitalizing their products when they...
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...Organizational Leadership LDR 531 Group Number: SC09MBA10 G. Edward McCullough, M.A. March 25, 2010 Examining a Business Failure: WorldCom Why do businesses fail? Most business corporations experience company failure because of their lack of organizational leadership and unethical practices, which can consist of fraud, conspiracy, falsifying documents, and embezzlement. An example of a business failure is most recognized by the WorldCom (2002) bankruptcy scandal. Many organizational behavior (OB) theories as it relates to leadership, management, and organizational structure can give in site to explain the company’s failure. Most blame for the WorldCom scandal was placed in its founder and CEO Bernard Ebbers due to his unruly managerial functions (planning, organizing, leading and controlling) that he practiced during his time at WorldCom. WorldCom was known as a telecommunication giant, established from nothing in 1983 to become the biggest accounting scandal in United States (U.S.) history in 2002. According to Jones Jonesington (2007) says, “In 1998, the telecommunications industry began to slow down and WorldCom’s stock was declining which gave CEO Bernard Ebbers increased pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses endeavors (timber, yachting etc.).”(Jonesington, J., 2007) WorldCom took another big hit in 2000 when it was forced to abandon its merger with Sprint, says Jonesington. (Jonesington, J., 2007) ...
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...Shiqi Wang ACCT 4456 Professor Steve Jensen September 22, 2015 WorldCom Case Analysis According to the section 301.4 of Sarbanes-Oxley Act of 2002, each audit committee shall establish procedures for complaints regarding accounting, internal accounting control, and auditing matters, and the anonymous complaints regarding questionable accounting or auditing matters. However, in this case, the WorldCom Company did not have the procedures for anonymous complaints, so Cynthia Cooper decided to go over Sullivan’s head and reported her findings to the audit committee. This was a huge gamble for her and was risking her career. Section 406 of the Sarbanes-Oxley Act of 2002 requires the disclosure of the code of ethics for senior financial officers. The commission shall issue rule to adopt a code of ethics, and if not, reasons must be disclosed. Also, section 406 defines “code of ethics” and requires the commission to disclose its changes of the code of ethics. The Sarbanes-Oxley Act was developed after a series of financial fraud events to prevent fraud incidences. In my opinion, Sarbanes-Oxley Act has an effect in preventing fraud incidences from occurring. First, it gains people’s awareness of ethical issues and consequences they will face in a company when they are in an ethical dilemma. Thus, the act provides a guide for the direction of managers’ behavior. Second, not only in the WorldCom case, but also in other financial fraud events that occurred during 2001 and 2002,...
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...BKAL3063 Integrated Case Study Group I A141 30 September 2014 Group Members: 1. Rose Atikahanum Binti Abdul Rahman 216666 2. Nor Amira Zuriyanti Binti Khalid 216410 3. Nurulnabila Binti Mohd Sanusi 216516 4. Peggy Liaw Wan Gene 216388 5. Willson Wong 216381 1.0 EXECUTIVE SUMMARY WorldCom was a telecommunications company and formerly known as Long Distance Discount Services (LDDS). The company was handled by Bernard J. (Bernie) Ebbers, one of the original nine investors, and managed to gain profit within one year of management. In order to maintain 42% of Expense-to-Revenue Ratio, David Myers (controller) asked Timothy Schneberger (director of international fixed costs) to adjust $370 million into accruals account. Sullivan (CFO) asked Myers and Yates (director of accounting department) to order managers in the company’s general accounting department to capitalize $771 million of expenses into an asset account. In 2000, Yates told Vinson and Troy Normand (manager in general accounting) that Myers and Sullivan wanted them to release $828 million of line accruals into the income statement. Besides that, the internal audit was primarily exist to measure business unit performance and enforce spending controls, whereas the external auditors, Arthur Andersen, was an independent auditors which performed the financial audits to access the reliability and integrity of the publicly reported financial information. Cynthia Cooper, the head of internal audit, had brought an issue...
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...[pic] WorldCom Case Study FINC 621, Summer 2015 by Hailun Cao Mohammed Altuwaijri Papamagatte Diagne Qian Dou David Ballantine Yanchao Wu Strategic Analysis – Hailun Cao Bernie Ebbers, the chief executive officer, focused on acquisition business strategy. Major Acquisitions includes Advanced Telecommunications Corporation, IDB Communications group, Metromedia Communications Corporation and Resurgens, and Williams Telecommunications group (WilTel). All these firms perform different characteristics in the telecommunications industry. WorldCom faced some issues and WorldCom tried to manage these issues through the expansion business strategy. From the view of risk control, WorldCom met and solved challenges in the following aspects. Firstly, because of the increasing competition, increasing commoditization and low switching costs of long distance service, the long distance calls dropped obviously and long distance firms faced huge pressures under this circumstance. Therefore, WorldCom made acquisition of MCI in 1997. WorldCom made this decision through three main reasons. At first, since WorldCom was the No. 4 long distance provider and MCI was the No.2 long distance provider, the combination of the two firms could occupy 25% share in the U.S. long distance market. This situation consolidated WorldCom’s competiveness in such a depressing environment and decreased the risk in the long distance service market. In addition...
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...WorldCom Case Study The problems with WorldCom are the lack of internal control, disordered corporate culture, management failure and the fraud accounting practices. In this case, the EBITDA has been largely exaggerated. A $3.8 billion EBITDA overstatement became WorldCom’s accounting shame. For companies, EBITDA is a way to measure the results of operations excluding the effect of interest, corporate income taxes, depreciation and amortization of long-term assets. It provides a way to compare operating income among companies. Factoring out interest cost, taxes, depreciation and amortization can make unprofitable companies as WorldCom look like to be profitable. In my view, when using EBITDA as a valuation tool, one should not use it alone. A close look at the historical net income, the information derived from the cash flow statement and the balance sheet is also very important. The failure of management and leadership was another crucial factor leading to the bankruptcy of WorldCom. First, the corporate culture enabled management to run an unchecked organization, allowing them to use tricky accounting to manipulate the numbers to meet their expectations. Bernie Ebbers (CEO) used the aggressive acquisitions to boost earnings, which were hastily done with overvaluing the acquired company. The improper valuation increased the company’s debt and decreased the revenue. Further, Ebbers borrowed millions of dollars from WorldCom as a personal loan and used his stock as collateral...
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...Answer no 1 (a): How senior managers at WorldCom managed earnings: Senior manager of WorldCom (CFO, Scott Sullivan) has cooked up the earnings of the company by violating the two basic rule of accounting i.e. accrual and capitalization. They overstate the company pre-tax income by releasing the accrual balance to the income statement and by capitalizing the operating expenses in the books (Dick Thornburgh, 2004). As per the GAAP (generally accepted accounting principles), a company should required to follow matching concept between revenue and expense for any accounting period. In year 1999 to 2000, the senior manager managed the earning by manipulating accounting entry of expense accrual i.e. they reverse the accrual to reduce the expense line in the income statement. Hence the accrual left in books was much lesser than as compare to the actual payment required to make in future (Hans-Ulrich Westhausen, 2010). In 2001 when only few accrual left to release, senior managers start disguising operating expenses as capital expenditure to avoid revealing of the losses of the company. As per GAAP, operating expense should booked entirely in the year to which it relate to while capital expenditure get capitalized and booked in expense head over the period in the form of depreciation. CFO, Scott Sullivan ordered the seniors to reclassify the operating expense to capitalize head so that they can be book in expense head over the period of time. Pressures led senior managers to manage...
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