Corporate Fraud: WorldCom Scandal - Essay Example

Corporate fraud: WorldCom scandal WorldCom Inc. was established in 1983 as Long Distance Discount Services (LDDS herein after) by David Singleton, Bernard Ebbers as well as Murray Walden. The trio was said to have charted their scheme to start a long distance company months before on a napkin in a coffee shop. Bernard Ebbers was chosen as CEO as well as the president of the new company. Ebbers did not have the technical expertise to manage a technologically oriented company. However, it took Ebbers below a year to make LDDS lucrative. WorldCom was profoundly dependent on acquisitions to stimulate its growth from 1983 all the way through to 1999. It made more than 60 acquisitions to become the second biggest long distance company in the U.S. LDDS later became a public company in 1989 after its purchase of advantage companies. WorldCom’s plan was to bring in economies of scale that were desperately needed to become successful in the flourishing telecom market at the time (Monks and Nell 577) (Fernando 218). LDDS then changed its name in May 1995, to WorldCom Inc. Nearly every one of WorldCom’s possessions were paid for by its stock. At first WorldCom was in the voice telephony business, however, novel technology as well as growing competition decreased revenues in addition to profits of the business. WorldCom consequently sought to broaden its horizons in mid-1990 by buying companies that facilitated it venture into data, satellite communications as well as webhosting market among others. Nevertheless, these businesses experienced their own slow down then making it difficult for WorldCom to meet its earnings forecast as well as its own revenue (Monks and Nell 577) (Fernando 218). Besides being seventy percent better than Enron in terms of assets, WorldCom Inc. was also the second biggest telecommunications company in the United States. In September 1998, WorldCom bought MCI; one of its largest achievements at an estimated cost of $40 billion. This was followed by another stab in October 1999 to buy Sprint; another telecom company. However, the department of justice declined this move after suspecting underhand dealings in the transaction. This was a crucial landmark in WorldCom’s history. The rebuff made WorldCom executives apprehend that mergers as well as acquisitions were not a sustainable growth approach. In June 25, 2002; WorldCom announced that it had deliberately furthermore inappropriately inflated its cash flow by $ 3.8 billion (Brooks and Paul 122) (Fernando 218). The declaration followed the resignation of WorldCom CEO Bernard Ebbers in the midst of questions of his personal loans from WorldCom as we as the launch of SEC’s investigations into WorldCom’s accounting. WorldCom later filed for liquidation protection in July, 2002. A year after rising from bankruptcy protection WorldCom amended its name from MCI to Verizon (Monks and Nell 576). The major personalities embroiled in accounting manipulations at WorldCom include: Bernard J. Ebbers (CEO), Scott D. Sullivan (CFO), Burford Yates (Director general accounting), David F. Myers (Controller), Betty, L. Vinson (Director of management reporting) and Troy M. Normand (Director of legal entity accounting) (Brooks and Paul 122). WorldCom’s financial meltdown took place at the center of the uproar emanating from events at the time that can be enumerated as follows: (a) the looming depression of stock markets at the time. (b) Enron’s liquidation in December 2, 2001 as well as the linked senate and congress hearings; plus the fifth amendment by Enron executives. (c) Petitions by president Bush as well as business leaders for reinstatement of trust in addition to reliability to financial markets, reporting as well as corporate governance. (d) Receptive introduction of governance guide lines by Stock and Exchange Commission (SEC). (e) Deliberations by U.S senate as well as congress of separate bills to enhance accountability in corporate governance. (f) Condemnation of Arthur Andersen, auditor of both WorldCom and Enron for impeding of justice, in June 15, 2002 (Brooks and Paul 121). WorldCom’s growth by acquisitions approach had four significant consequences for the company as well as its investors. The consequences can be enumerated as follows: First, WorldCom plainly grew very rapidly; such rapid growth entailing distant operations presented a considerable management test, straining WorldCom’s internal controls as well as resources. Regrettably, WorldCom’s internal audit department which should have been liable for ensuring apt controls were in place was mainly focused on operational matters plus was notably understaffed. Additionally, ample systems were not in place to avoid manual adjustments like the ones that amounted to the WorldCom fraud from being made without any reporting. Second, the steady flow of WorldCom’s possessions made it very hard for investors to evaluate results from one stage to another. WorldCom’s continuous as well as unrelenting growth may have masked the capacity of investors to independently assess as well as focus on concrete financial performance and strength of the company at various points in time. Third, the price of WorldCom’s stock used as acquisition currency was of supreme value. Financial analysts’ earnings prospects were a common subject of discussion at meetings of WorldCom’s top management. Chief Financial Officer (CFO) Sullivan pleaded guilty of fabricating WorldCom’s financial statements to meet analyst prospects. Lastly, WorldCom’s repeated financing transactions as well as acquisitions made WorldCom a preferred corporate finance client for investment banking firms creating conflicts of interests that hindered key gatekeepers from representing investors’ interests (Monks and Nell 577). WorldCom’s accounting manipulations entailed a very fundamental approach to fraud. Exaggerations of cash flow as well as income that were crafted as a result of WorldCom’s major expenses or fees paid to intermediary telecommunication network providers for the right to access intermediary networks were accounted for inappropriately. Essentially, line costs that should have been expensed thus lowering reporting income were made up for by capital transfers or charged against capital accounts, consequently placing their impact on the balance sheet instead of the income statement. Additionally, WorldCom had established excess reserves or provisions for future expenses which they later released or reduced thus mounting profits. The cumulative exaggeration of WorldCom’s revenue rapidly increased to over $ 9 billion by September 19, 2002 for the subsequent reasons: $3.85 billion for inappropriately capitalized expenses publicized on June 25, 2002. $3.83 for more inappropriately capitalized expenses in 1999, 2,000, 20001 as well as first quarter of 2002 declared on August 8, 2002 and lastly $2 billion for manipulations of profit through previously instituted reserves dating back to 1999 (Brooks and Paul 122). WorldCom’s growth began to meltdown by 2001, mainly due to the turndown in the economy, overcapacity, turn down in revenues as well as to huge debts at the time. These factors caused WorldCom to later plunge into bankruptcy. The WorldCom’s stock in June 1999 was selling at double digits, however, by January 2004 it was of no value (Fernando 218). Bernard Ebber was ultimately convicted of fraud, conspiracy as well as fabricating false statements to regulators about WorldCom’s financial condition; he was sentenced to 25 years in prison. Ebbers’ accomplice in fraud, Scott Sullivan also pleaded guilty to fraud, conspiracy and filing false statements to regulators. WorldCom’s scandal shows the significance of sturdy gate keepers including: securities analysts, auditors and boards of directors in protecting investors (Monks and Nell 576). A culture of poor corporate governance as well as negligent oversight by auditors established a custom that prioritized WorldCom’s stock price above all things while ignoring mechanisms needed to avoid fraud(Monks and Nell 576). I would employ antifraud and internal controls to avert fraud of WorldCom’s magnitude from happening ever again. At some point in market as well as sector expansions similar to the one that helped WorldCom in the 1990’s, employing antifraud and internal controls to avert fraud might seem unnecessary or even troublesome. However, such checks and balances are critical to guarantee that the managements of corporations such as WorldCom that are often faced with competitive pressures as well as unstable business models, do not give in to the lures of manipulating the numbers to falsify a company’s financial condition. The internal controls model is essentially a scheme of checks as well as balances used to avert financial loss while ensuring truthful financial reporting. (Monks and Nell 580). The main component of any antifraud program is a fitting code of conduct or ethics policy which helps inculcate honesty as well as honor in an organization. The code of conduct ought to be well known by all employees. Previous to fraud risks being alleviated the risks must be identified as well as accurately quantified as to their possible financial impacts as well as possibility. These two factors would abet in ascertaining the method of risk mitigation in order to ease corporate fraud (Biegelman and Joel 108). . Works Cited. Biegelman, Martin T, and Joel T. Bartow. Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance. Hoboken, N.J: Wiley, 2006. Internet resource. Brooks, Leonard J, and Paul Dunn. Business & Professional Ethics for Directors, Executives, & Accountants. Mason, OH: South Western Cengage Learning, 2010. Print. Fernando, A C. Corporate Governance: Principles, Policies and Practices. New Delhi: Pearson Education, 2009. Print. Monks, Robert A. G, and Nell Minow. Corporate Governance. Chichester, England: John Wiley & Sons, 2008. Print. Read More