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    Accounting Info - Updated partHDTASTF - Roldan

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    Ryan Joseph Agluba Dimacali
    WorldCom began as a long-distance resale company that grew through acquisitions into a telecommunications giant. Its CEO, Bernie Ebbers, had inflated profits through improper accounting of expenses as assets, overstating income by billions. When the telecom industry declined, WorldCom's fraud was revealed, becoming the largest accounting scandal in US history and leading to its bankruptcy. The lack of strategy, ethics code, and positive culture under Ebbers' leadership had enabled the massive fraud.

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    Accounting Info - Updated partHDTASTF - Roldan

    Uploaded by

    Ryan Joseph Agluba Dimacali
    42 views16 pages
    WorldCom began as a long-distance resale company that grew through acquisitions into a telecommunications giant. Its CEO, Bernie Ebbers, had inflated profits through improper accounting of expenses as assets, overstating income by billions. When the telecom industry declined, WorldCom's fraud was revealed, becoming the largest accounting scandal in US history and leading to its bankruptcy. The lack of strategy, ethics code, and positive culture under Ebbers' leadership had enabled the massive fraud.

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    WorldCom began as a long-distance resale company that grew through acquisitions into a telecommunications giant. Its CEO, Bernie Ebbers, had inflated profits through improper accounting of expenses as assets, overstating income by billions. When the telecom industry declined, WorldCom's fraud was revealed, becoming the largest accounting scandal in US history and leading to its bankruptcy. The lack of strategy, ethics code, and positive culture under Ebbers' leadership had enabled the massive fraud.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    42 views16 pages

    Accounting Info - Updated partHDTASTF - Roldan

    Uploaded by

    Ryan Joseph Agluba Dimacali
    WorldCom began as a long-distance resale company that grew through acquisitions into a telecommunications giant. Its CEO, Bernie Ebbers, had inflated profits through improper accounting of expenses as assets, overstating income by billions. When the telecom industry declined, WorldCom's fraud was revealed, becoming the largest accounting scandal in US history and leading to its bankruptcy. The lack of strategy, ethics code, and positive culture under Ebbers' leadership had enabled the massive fraud.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    of 16

    What is WorldCom?

    • It is America's second-biggest
    long-distance phone company,
    built up over the years through a
    dizzying array of mergers and
    acquisitions by its founder,
    Bernard Ebbers
    How did WorldCom
    begin?
    • WorldCom came into existence
    as a result of a merger between
    an obscure long-distance resale
    company, LDDS (Long Distance
    Discount Service), and two
    smaller firms, MFS
    Communications and UUnet in
    the early 1990s. The acquisition
    spree culminated in the 1998
    $37bn merger with MCI,
    America's second-largest long-
    distance phone company after
    AT&T.
    How did WorldCom
    begin?
    • WorldCom was not just the
    biggest accounting scandal in the
    history of the United States, but
    also one of the biggest
    bankruptcies. A
    telecommunications giant, the
    revelation that it had cooked
    its books came on the heels of
    the Enron and Tyco frauds, which
    had rocked the financial markets.
    Breaking down
    WorldCom
    WorldCom

    • Its CEO, Bernie Ebbers had built the company


    into one of America’s leading long-distance
    phone companies, by buying other telecom
    companies.

    • WorldCom has become a byword


    for “accounting fraud”

    • a warning to investors that when things seem too


    good to be true, they just might be.

    • This spate of corporate crime led to


    the Sarbanes-Oxley Act in July 2002
    WorldCom

    • But when the tech boom turned to bust, and companies


    slashed spending on telecoms services and equipment,
    WorldCom resorted to accounting tricks to maintain the
    appearance of ever-growing profitability.

    • it was revealed that in the year 2000 he had borrowed


    $400 million from Bank of America to cover margin
    calls using his WorldCom shares as collateral. As a
    result, Ebbers lost his fortune.

    • In late June 2002, World Com announced


    that it had inflated assets by $ 3.5B, the
    largest accounting fraud in history
    WorldCom

    WorldCom filed for bankruptcy on July 21, 2002, only a month after
    its auditor, Arthur Andersen, was convicted of obstruction of justice
    for shredding documents related to its audit of Enron, ‘America’s
    Most Innovative Company’. Arthur Andersen, which had audited
    WorldCom's 2001 financial statements, and reviewed WorldCom’s
    books for the first quarter of 2002, was later to have ignored memos
    from WorldCom executives informing them that the company was
    inflating profits by improperly accounting for expenses.
    Fraudulent
    Activities
    • This was not a sophisticated fraud. To
    hide its falling profitability, WorldCom
    had simply inflated net income and cash
    flow by recording expenses as
    investments. By capitalizing expenses it
    exaggerated profits by around $3 billion
    in 2001 and $797 in Q1 2002, and
    reported a profit of $1.4 billion instead of
    a net loss.
    The Effect of Fallout
    • Removal of Top Management:
    − Bernard Ebbers
     Ex-WorldCom CEO

    − Scott Sullivan
     Former CFO of WorldCom

    − David Myers
     Former WorldCom controller

    • Replacement of Board of Directors


    The Effect of Fallout
    • It has an effect on:

     Telecommunication Market

     Stock Market

     Investment and Lender


    How did the auditors
    spot the fraud?
    • it overstated its profits by $3.8bn.

    • The group has admitted that it did not


    actually make the $1.4bn of profits it
    reported in 2001, nor the $130m stated
    during the first three months of 2002.
    How did the auditors
    spot the fraud?
    • Andersen said that Mr Sullivan withheld
    information during the audit.

    • Andersen discovered that the expenses


    had been reported as investment

    • it advised WorldCom's audit committee


    and its new management that financial
    statements for 2001 should not be relied
    upon.

    • WorldCom replaced Andersen with


    KPMG last month.
    What Could Have
    Been Done to Prevent
    the Scandal?
    • Internal Environment

    Strategy (or lack thereof)

     A competitive strategy searches for a favorable


    competitive position in a company’s
    industry, aiming to establish a position in which
    the company is profitable and sustainable
    against its competitors. The management at
    WorldCom was so determined to grow that it not
    only failed to create a competitive strategy, but
    also did not see that with growth comes “the
    need to maintain” to prosper. In the end, that
    lack of strategy prevented it from effectively
    planning and determining a position to acquire
    that prosperity.
    What Could Have
    Been Done to Prevent
    the Scandal?
    • Company Culture

    Top Management’s Managing Style

     To prevent fraud, the opportunity to commit fraud


    should be minimal or non existent. Creating a work
    culture of “honesty, openness, and assistance” is key
    to fraud prevention. First, it is important to hire
    honest people and train them in fraud awareness,
    and to present a code of conduct or ethics that is not
    only stated on a piece of paper, but is truly respected
    and followed by other employees including top
    management.
    Second, a positive work environment must be create
    d. Third, employees must be provided with
    assistance programs.
    What Could Have
    Been Done to Prevent
    the Scandal?
    • Company Culture

    Top Management’s Managing Style

     Implementing a code of ethics and having


    employees read and sign it periodically can
    reinforce ethical conduct as well emphasize that it
    is important to the company. The lack of a code of
    ethics at WorldCom shows that no training on
    awareness of fraud or ethics was conducted.
    Therefore, it is very possible that when the
    employees reported existing customers as new
    ones, they were not aware of the obdurate
    consequences that may occur.
    What Could Have
    Been Done to Prevent
    the Scandal?
    • Company Culture

    Top Management’s Managing Style

     A low fraud environment could have been created if Worl


    dCom’s culture consisted of positive work environment
    elements such as employee assistance programs that
    make it easier for the employees to not only report fraud,
    but also decrease their own likelihood of committing it.
    Open door policies, positive personnel, and operating
    procedures could have been implemented to diminish
    the barrier between employees and upper management.
    Unfortunately, in the case of WorldCom, the personnel
    themselves were involved in the fraud. Yet, if the
    personnel were the ones to implement the positive work
    environment, they might not have been involved in the
    fraud in the first place.

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