WORLDcoM

Topics: Board of directors, Corporate governance, Fraud Pages: 28 (6193 words) Published: December 27, 2014
CASE 3 : Accounting Fraud at WolrdCom

Table of Contents
Introduction....................................................................................................................... 1 Question 1 .......................................................................................................................... 2 Question 2 .......................................................................................................................... 4 Question 3 .......................................................................................................................... 6 Question 4 ........................................................................................................................ 10 Question 5 ........................................................................................................................ 16 References........................................................................................................................ 24

BKAL 3063 Integrated Case Study

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CASE 3 : Accounting Fraud at WolrdCom
Introduction
WorldCom, US second largest telecommunication company shocked the world by filing bankruptcy at 21 July 2002. The WorldCom filing surpassed Enron and became the largest bankruptcy filing in United States history. Due to its rapid growth, WorldCom is also heavily in debt as they finance the company growth with debt. The collapse of WorldCom did not just affect their employees, retailers, the government but also bankers. WorldCom was a multi-billion dollar telecommunications company that was founded in 1983. The company starts their business under the name 'Long Distance Discount Services' (LDDS), providing long distance telecommunication services. The venture was profitable right from the start. In 1985, Bernie Ebbers became the company's CEO. The company changes its name to WorldCom in 1995.

During the 1990’s, the company starts to grow through series of successful acquisition and merger. However, during the late 1999, the company’s performance begins to slip due to heightened competition, overcapacity and reduced demand for telecommunication services at the onset of the economic recession and the aftermath of the dot-com bubble collapse. Other than that, falling telecommunications companies and new entrants were drastically reducing their prices leads WorldCom. All these pressures caused WorldCom to involve in accounting fraud.

Scott Sullivan, WorldCom's CFO, begins the process of misallocating as capital expenditure what should have been normal expenses, thus turning losses into profit, creating a smokescreen that the company is performing well. Things start to come under light at June 2002 and the company’s stock price plunged. Investigations were carried out. On June 25, WorldCom admits that it had inflated its earnings by $3.8 billion -- the largest accounting fraud in history. After series of investigation, the total amount discovered from improper accounting procedures raised to $9 billion causing WorldCom to file bankruptcy in July. Several top management personnel were held responsibilities for the fraud.

BKAL 3063 Integrated Case Study

1

CASE 3 : Accounting Fraud at WolrdCom
Question 1
What are the pressures that lead executives and managers to “cook the books”?

Issue
When 1990, 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 cant Wall Street analysts' expectations. These situation pressures WorldCom to cook the books.

Analysis of Issue
In an effort to increase revenue, Ebbers put pressure his employees that he wanted by the number one stock in Wall Street. He demanded his employees to increase the revenues that focused on building revenues and acquiring capacity sufficient to handle expected growth even if the long-term cost exceeds the short-term...

References: ATLAS, S. R. (2002, July 22). WORLDCOM 'S COLLAPSE: THE OVERVIEW;
WORLDCOM FILES FOR BANKRUPTCY; LARGEST U.S
litigation & Regulation: Fuel to the fire: Whistle-blower incentives in the Dodd-Frank
Act, Publication of Thomson Reuters: Westlaw Journal (August, 2010).
Manual G Velasquez (2012), Business Ethics: Concepts and Cases 7th Edition, A Pearson
publication, chapter 1: basic principles ethics in business, pages 56-61.
The Associated press, “Ex-WorldCom Accountant Gets Prison Term”, The New York
Times publication (August 6, 2005):
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