...Review of Accounting Ethics ACC557 Financial Accounting Ethics in Accounting and the Fall of WorldCom In 2002, WorldCom was the second largest telecommunications company in the United States, but because of management failures and an unethical accounting culture it went bankrupt. This paper contains a discussion describing corporate ethics currently used in business; WorldCom's background, and the ethical breach; how WorldCom's ethical issue was discovered, describing how management failed to create an ethical environment; and recommendations. A conclusion summarizes the paper. Corporate Ethics If a company is driven by its responsibility to its Shareholders, then it should base its decisions and actions on the best interests of the owners, and generate more profit. If the company is stake-holder driven then its decisions and actions should be based on what is in the best interest of those impacted by the business (Gruble, 2011). Gruble (2011) further argued that "The most widely accepted definition for business ethics says that it is a set of corporate values and codes of principles, which may be written or unwritten, by which a company evaluates its actions and business-related decisions.” WorldCom was a company driven by its responsibility to its shareholders to the point where it began to behave unethically and this ultimately led to its demise. WorldCom History and the Ethics Breach In 1983, two business men, Murray Waldron and William Rector, created a plan...
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...Running Head: WORLDCOM AND ETHICS IN ACCOUNTING 1 WorldCom and Ethics in Accounting Brian Bartram Professor Hogan Strayer University Accounting 557 11/05/2012 WORLDCOM AND ETHICS IN ACCOUNTING 2 There have been many corporate and ethical breeches over the years in financial record keeping but it is believed that the current business and regulatory environment is conducive to ethical behavior. Unfortunately, publically traded companies have been prone to the proverb “one bad apple spoils the barrel”. When unethical practices are exposed, of a publically traded company, the effects can be tremendous and affect every individual or entity that is tied to the organization. For ethical principles to apply to companies, it must be shown that they can be considered moral or ethically responsible institutions. The Securities and Exchange Commission (SEC) is a US regulatory agency that has the authority to establish accounting standards for publically traded companies ("Quickmba financial accounting," 2010). When the SEC was established in 1934 there was no accounting standards issuing body. The SEC has encouraged the private sector to set the standards. In 1939, encouraged by the SEC, the American Institute of Certified Public Accounts (AICPA) formed the Committee on Accounting Procedure (CAP) which dealt with accounting issues as they arose from 1939 to 1959...
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...Ethics Assignment: Worldcom case Introduction: On 21 July 2002, WorldCom, Inc., the then-second largest telecommunications company in the U.S. filed bankruptcy protection. Its failure was due to its executives’ bad business behaviors to manipulate earnings with improper accounting entries. The key persons involved in the fraud were as follows; CEO Bernard Ebbers, CFO Scott Sullivan, the accountants were Bufford Yates (Director of General Accounting), David Meyers (Controller), Troy Norman (Director of Legal Entity Accounting), and Betty Vinson (Director of Management Reporting), pressured by CEO and CFO to prepare improper accounting entries. Those executives and accountants were convicted of securities fraud and received federal jail sentences after the manipulation came out in public. What institutional setting and pressures is Betty Vinson exposed to? WorldCom profits gone down in October 2000, and Better Vinson’s boss, Buford Yates (Jr. Director of General Accounting) asked her and another manager to release $828 million of line accruals into the income statement. The company was facing revenue and pricing pressure then, and the CEO had threatened his staffs about how he and other directors would lose everything if the company did not improve its performance. WorldCom’s corporate culture of encouraging “systemic attitude conveyed from the top down that employees should not question their superiors, but simply do what they were told” also made it more difficult for Vinson...
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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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...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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...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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...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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...summer 2002 WorldCom, the fastest rising company in the US history with its CEO of 17 years Bernard Ebbers was busted for fraudulent financial activities (American Greed, 2008). The history of the company dates back to 1983 when Long Distance Discount Services (LDDS) was founded. The company was providing long distance calling for cheap by doing acquisitions and buying smaller phone companies (American Greed, 2008). Bernard Ebbers was company’s CEO and within 10 years he was able to make LDDS into the largest telecom company with a revenue of US 6 billion (American Greed, 2008). In 1998, Ebbers performed the biggest merger by buying out MCI. Company’s name was changed to WorldCom to reflect its size and capacity. In 1999 WorldCom’s performance was at its highest peak, with its stock at US 68 per share (American Greed, 2008). Ebber’s main strategies as CEO of WorldCom were: aggressive acquisitions; and cost control by “hammering off pennies” (American Greed, 2008). Even though Ebbers was cutting costs at WorlCom by refusing to provide free coffee to his employees, he was splurging extensively. In the late 90’s, Ebbers bought a percent of hockey team, not only he owned several yachts but he also bought yachts building company, he purchased a biggest ranch in the US, timberland, crawfish company, golf course, etc. Money for these purchases came from Ebbers’ personal loans from JPMorgan and Citi bank and totaled US 408 million. Ebbers secured the loans with WorldCom stock (American...
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...Running head: Review of Accounting Ethics 1 Review of Accounting Ethics Cynthia Harley Dr. Julie Hamm Acc 557 5/1/2014 Review of Accounting Ethics The WorldCom Scandal Vikalpa: The Journal For Decision Makers provides us with the following excerpt from WorldCom’s 2002 press release: CLINTON, Miss., June 25, 2002 –- WorldCom Inc. (Nasdaq: WCOM, MCIT) today announced that it intends to restate its financial statements for 2001 and the first quarter of 2002. As a result of an internal audit of the company’s capital expenditure accounting, it was determined that certain transfers from line cost expenses to capital accounts during this period were not made in accordance 2 with the generally accepted accounting principles (GAAP). The amount of these transfers was $3.055 billion for 2001 and $797 million for the first quarter of 2002. Without these transfers, the company’s reported EBITDA would be reduced to $6.339 billion for 2001 and $1.368 billion for the first quarter of 2002, and the company would have reported a net loss for 2001 and for the first quarter of 2002 (Pandey & Verma, 2004, p. 113). This information came at a time where the company had reached an all time high in the industry, second only to AT&T. The company originally started out as a small provider of long distance telephone service in Mississippi under the name LDDS and later changed its name to WorldCom. During the 1990’s the company took on an aggressive acquisition strategy acquiring the likes...
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... many unethical accounting scandals existed. The WorldCom scandal is one of the most known unethical scandals. WorldCom submitted the largest bankruptcy filing in United States’ history after admitting improperly accounting for more than $3.8 billion dollars in expenses (Moberg, 2012). 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 (Moberg, 2012). This was not unethical; however, what investors and others were to uncover in the coming years, was. Through its favorable stock, WorldCom acquired MCI Communications and MFS Communications, which allowed WorldCom to offer long distance, local service, and data services (Moberg, 2012). Chief Executive Officer Bernie Ebbers led the company’s stock to increase from pennies, to more than $60 per share (Moberg, 2012). Where the unethical behavior of WorldCom occurred was in financial reporting. The company would write down millions of dollars in assets it acquired. According to Moberg (2012), “[It] included in this charge against earnings the cost of company expenses expected in the future. The result was bigger losses in the current quarter but smaller ones in future quarters, so that its profit picture would seem to be improving” (para. 13). WorldCom also reduced the book value of some of the acquired...
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...Ethics in Finance To help demonstrate why ethics in finance is need the falling of WorldCom is used. In the matter of three years WorldCom went from one of the most successful and promising companies to a bankrupted and absorbed company because of upper management lacking ethics. In early 2001 WorldCom expected and thus projected the use of internet to increase and so they made a significant amount of leases to internet and telecom service providers. However, the internet usage did not increase but crashed causing many of WorldCom’s leases to default. To help save their appearance WorldCom used reserve account to cover operating expenses, making it look as if they made money despite the many defaults. WorldCom did this knowing it would violate transfer rules and the proper use of Reserve Accounts. By the end of the 1st Quarter, 2002, WorldCom had fraudulently transferred 3,062 million dollars. Due to the amount the three internal accountants, who helped with the transfers, grew deeply upset and choose to meet with the SEC, FBI, and U.S. Attorney’s Office on June 24, 2002 to bring forth WorldCom’s fraud. The news of WorldCom’s fraud caused their stocks to plummet leading them to bankruptcy by July of 2002. WorldCom changed its name, MCI Communication, in attempts to come back from the fraud scandal. They were unable to do so and were acquired by Verizon in 2005. The WorldCom case shows how unethical behaviors escalate in a small amount of time. There are five arguments...
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...used to inflate revenue numbers by manipulating projections for future revenue. Sherron Watkins, an Eron VP, wrote an anonymous letter suggesting that the CEO had left the company because of improprieties and other illegal actions. She questioned the accounting methods and specifically citied certain transactions. Once Enron’s stock began to fall below a certain point, the results started to show on the financial statements. Finally in November of 2001 Enron officials admitted to overstating company earnings and filed for bankruptcy. This resulted in jail time and 78 counts of fraud for Andrew Fastow, CFO and 24 years in prison for prior CEO Jeff Skilling. WorldCom had a similar situation, as the expenses as a percentage of their total revenue increased because the growth rate of its earnings dropped. As a result, WorldCom reduced the money it held in reserve by $2.8 billion and moved this money into the revenue line of its financial...
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...Ethics in the Corporate World ACC 557 Financial Accounting January 26, 2014 In today’s society, it seems that most companies are out to chase the almighty dollar and have little to no concern for the repercussions of their actions. In this paper, we will address five aspects of the corporate world and the ethical breaches that have been made in the last few years. The company that we will look at for examples is WorldCom. WorldCom was one of the companies that led to the creation of the Sarbanes-Oxley Act of 2002. The five questions that we will address in this paper are: 1. Is current business and regulatory environment more conducive to ethical behavior? 2. What impact was done to WorldCom because of the accounting ethical breach? 3. How was WorldCom caught and how they failed to be ethical? 4. What accounts were impacted and the resulting impact on operations? 5. What measures could have been taken to prevent this breach? The first thing that we will do is to describe how WorldCom came to be one the biggest companies in the telecommunications industry. WorldCom began in 1983 in Clinton, Mississippi as a long distance company called Long Distance Discount Services. As a result of several mergers that began in 1985 after the board elected Bernie Ebbers as the company CEO, the company grew by leaps and bounds. On November 4, 1997, WorldCom and MCI Communications announced their $37 billion merger to form MCI WorldCom, making it the largest corporate...
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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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...Who is WorldCom? The company began as Long Distance Discount Services, Inc. (LDDS) in 1983, based in Hattiesburg, Mississippi. In 1985, LDDS selected Bernard Ebbers to be its CEO. The company went public in 1989 through a merger with Advantage Companies Inc. The company name was changed to LDDS WorldCom in 1995, and later just WorldCom. The company’s growth under WorldCom was fueled primarily through acquisitions during the 1990s and reached its apex with the acquisition of MCI in 1998. Among the companies that were bought or merged with WorldCom were Advanced Communications Corp. (1992), Metromedia Communication Corp.(1993), Resurgens Communications Group(1993), IDB Communications Group, Inc (1994), Williams Technology Group, Inc. (1995), and MFS Communications Company (1996). The acquisition of MFS included UUNET Technologies, Inc., which had been acquired by MFS shortly before the merger with WorldCom. In February 1998, a complex transaction saw WorldCom purchase online pioneer CompuServe from its parent company H&R Block. WorldCom then retained the CompuServe Network Services Division, sold its online service to America Online, and received AOL's network division, ANS. The acquisition of Digex (DIGX) in June 2001 was also complex; Worldcom acquired Digex's corporate parent, Intermedia Communications, and then sold all of Intermedia's non-Digex assets to Allegiance Telecom. November 10, 1997, WorldCom and MCI Communications announced their US$37 billion merger to form...
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