Worldcom - Reasons behind the Collapse and Nature of the Frauds - Case Study Example

WorldCom Table of Contents WorldCom Table of Contents 2 Introduction 3 Brief Background of WorldCom 4 The Reasons behind the Collapse 5 The Nature of the Frauds 8 Conclusion 12 References 13 Bibliography 15 Introduction In the year 2002, a few instances of corporate issues were witnessed which included the cases of Enron and WorldCom. It was in this context that the occurrence of the issues related to WorldCom was widely referred as a consequence of unsuccessful corporate governance and outright greed followed by accounting exploitations. The conception of corporate governance is considered to play an integral part with regard to aspects such as lucidity and truthfulness in terms of financial reporting. Corporate governance is known to entail associations amid the board, other bodies involving an indirect form of engagement with the organization, management and stakeholders of the organisations. The mentioned aspect is even supposed to present a comprehensive composition from which the intentions of that particular organization are believed to descend. However, it becomes imperative to mention the procedure through which the behaviours of the directors in a particular organization are supervised and controlled. The process is also learnt to entail the factor of decision making, supervision and responsibility and is termed as corporate governance on the whole (Monks & Minow, 2011: 433). Brief Background of WorldCom WorldCom was founded in Mississippi. The nature of its business operations was telecommunications and the company was learnt to have surfaced from murkiness in a period of rage in relation to corporate behaviour with regard to the mentioned sector. The rage was measured to be let loose as a result of deregulation in the telecommunications sector in the United States (US). The company was successful in emerging as amongst the leading long-distance carrier in the US telecommunications sector with the aid of its frantic sequence of takeovers amounting to nearly 72 in about 17 years. The company also proved successful in establishing the protocol network of internet which was gauged to be amongst the largest in the entire globe. The development of the company was further believed to be fundamentally led by the various amounts of acquirements during the period of 1990s. It i worth mentioning that Bernard Ebbers was selected as the Chief Executive Officer (CEO) of the company in the year 1985 and was considered to be majorly responsible for the progress as well as for the downfall of the company. The progress of WorldCom attained its zenith with the acquirement of MCI Communications in the year 1998 which was recorded to be the biggest and most noteworthy corporate merger (Ngoda, 2011). The Reasons behind the Collapse A huge amount of accounting misstatements was identified as the major reason that triggered the collapse of WorldCom. The accounting misstatements were found to conceal the progressively grave situation of the mentioned company. Fake or rather unproven accounting entries involving a huge amount were learnt to be made in the financial methods of the company with the intention of attaining the aspired record of financial results. The major contributor to trigger such a fraudulent activity was stated to be the pursuance of a particular business strategy by the CEO, Bernie Ebbers. During the period of 1990s, the only focus of the CEO was supposed to be on the attainment of remarkable progress with the help of acquirements. The company was learnt to be making aggressive moves towards acquiring other companies with the aid of the stocks held by the company. The stocks of the company called for the requirement to record a constant rise in terms of their worth in order to carry out the acquiring spree. However, this particular aggressive strategy followed by Bernie Ebbers witnessed a halt when the company was compelled to discard a planned unification with Sprint owing to antitrust oppositions (Berglund, n.d.). This definite halt triggered a strong influence over the CEO to project a picture of ever rising income as well as revenue. The only way of doing this was perceived to be with the help of financial gimmickry. The structure in relation to the corporate governance of the company brought into light a few of the issues persisting within the company. It was later observed that this particular large company carried out its operations in the absence of a right set of independent directors. The member board of the company which was believed to entail nine members was actually formed with corporate insiders who were friends of the CEO and also other executives who previously belonged to the purchased companies (Ngoda, 2011). Majority of the external directors of the company lacked direct engagement or access to the regular business functions with regard to the company. The external directors nearly had no contact with the employees working within the company indicating a weak communication process. The company also had no proper system which would have permitted the employees to get in-touch with the board regarding financial as well as operational issues witnessed by the company. The weak internal management of the company was identified to be a grave issue by the department of internal audit of the company in comparison to the external form of financial reporting made by the company. During this particular point, it was assessed the constant success of the company turned out to be reliant on Bernie Ebbers’ competence in dealing with the internal business functions of a supposedly immense company. However, the attempts made by the CEO in this context proved to be ineffective, as the prospects of a double-digit rise of the Wall Street index was constantly catered to. Additionally, the subordinates were commanded to satisfy such expectations of the CEO (Ngoda, 2011). A significantly untrue picture was offered by Bernie Ebbers to the Board of Directors, to the market and also to majority of the employees associated with the company. It was learnt that a constant dynamic progress was first predicted and was then reported by Bernie Ebbers in spite of the internal information received regarding the development of the company which was highly contradictory to the made predictions. The unrelenting employment of the non-recurring matters or items for the reason of heightening the reported revenues was also allegedly concealed by the CEO (Ngoda, 2011). The other major factor that was supposed to have contributed to the occurrence of the scam or deception was measured to be the quite perceptible desire of Bernie Ebbers’ to establish along with safeguard his individual financial condition. This specific reason made Bernie Ebbers project a constantly progressing net worth for the reason of keeping away from margin calls with regard to the personal stocks of WorldCom that were later found to be pledged by him with the intention of securing the personal loans. Therefore, it can be stated that the two main reasons which led towards the ultimate fall of the company was deceitful accounting practices falsely inflating the revenues of the company (Romero & Atlas, 2002). The fraudulent practices were put into practice under the guidance of the Chief Financial Officer (CFO) of the company, Mr. Scott Sullivan. The additional falling business functions and the deficiencies witnessed in terms of financial targets that were declared by Bernie Ebbers made Scott Sullivan trigger the creation of accounting records which were actually baseless in connection with the Generally Accepted Accounting Principles (GAAP). It was owing to the reason of making an untrue manifestation that the declared financial targets were attained by the company (Moberg, 2010; pp. 1-9). It could be well understood from the analysis of the reasons concerned with the collapse of WorldCom that the failure in terms of corporate governance could be attributed as a chief reason. The company was found to deliberately violate the combined code in relation to the aspect of corporate governance. The code is stated to provide a direction regarding few of the vital mechanisms towards effectual board practice. The code is also supposed to be reliant on the fundamental principles associated with corporate governance such as transparency, focus, accountability and probity (Financial Reporting Council, 2010; pp. 1-35). The combined code was later found to be revised after the collapse of a few of the renowned corporate entities including WorldCom. Consequently, a fresh Code was formed in the year 2003 which was learnt to integrate quite some chief standards concerning the aspect of compliance with respect to the specified responsibilities of the chairperson as well as of the chief executive of a particular company. The freshly revised Code was observed to offer increased eminence to the responsibilities carried out by the non-executive directors in relation to the corporate governance framework along with their roles in the procedure of decision-making of the company. The new Code also lays stress on the imperativeness regarding the degree of independence needed by the non-executive directors. Thus, it can be observed that the fresh Code was developed with the intention to ensure a transfer regarding the distribution or sense of balance in relation to the authority from the executive directors of a particular company to its non-executive directors. The transfer was perceived to be necessary for the reason of ensuring increased level of independence and neutrality with regard to the decision-making procedures of the concerned company (Pass, 2006; pp. 1-7). The Nature of the Frauds The inaccurate form of accounting at WorldCom took place in two different varieties. The initial form was stated to be the drop of the reported line expenses which was considered to be the largest group of costs with regard to the company. The other form of inaccurate accounting took place in the shape of exaggerating the reported revenues. The general intention of these endeavours was to cling on to the reported line expenses to nearly 42 percent of the complete revenue when in actuality the reported line expenses were measured to surpass the specified levels and reached to 50 percent. The company was indulged in certain inappropriate practices for the reason of constantly being able to report a double-digit rise in the revenue in contrast to the real rise in the rates which were then recorded to be considerably lesser (Kuhn & Sutton, 2006; pp. 61-80). The assessment of the reasons behind the collapse of the company reveals that majority of the employees or the individuals engaged with the financial functions at different levels with regard to the concerned company were conscious in anecdotal degrees regarding the fraudulent practices of the senior management. The reason behind hiding the facts of such misconducts by the employees were observed to be initiated partially owing to a culture that was mainly perceived to have been originated from its respective corporate headquarters. The mentioned culture was further learnt to lay increased stress on the aspect of numbers in comparison to the other facets and therefore concealed the financial information from the concerned authorities or the personnel. The culture also made the employees to completely rest their respective faith on the senior officers’ in spite of the confirmation regarding their improper deeds. The culture was also learnt to avoid any kind of disputes which discouraged the reporting of such improper behaviours of the senior officials by the employees (Elchenwald, 2002). The company entailed a range of certain mechanisms which restricted the management of the financial information and was only made accessible for the senior management which made few of the individuals just learn the nature as well as size with regard to the accounting misdeeds. The chief financial branch of information was found to be shared only among a close circle of senior personnel. Bernie Ebbers and Scott Sullivan were recognized to be the chief individuals who were involved with the financial dealings of the company. Both the individuals were measured not to be essentially inappropriate in their characteristics but gave rise to contradictory loyalties as well as discouragements with the intention to persist on appropriate conducts. For instance, since the year 2000 and 2002, Bernie Ebbers was found to individually provide a loan to the Chief Operating Officer, Mr. Ron Beaumont, amounting to US $ 650,000 for a period of sixteen months. These kinds of loans or financial arrangements were held accountable for triggering an innate dispute in terms of responsibility of devotion with regard to an officer and the personal financial reliance on the CEO. It was thus inferred that financial incentive in the form of loan was provided to Ron Beaumont with the intention of making him circumvent towards any form of a dispute with Bernie Ebbers (Moberg & Romar, 2009; pp. 1-9; Beresford & et. al., 2003, pp. 1-340). During the later period of the year 2000, few of the managers of the company were also found to be provided with personal gifts from Scott Sullivan which amounted to a minimum of US $ 140,000. These gifts were perceived to be provided for the reason of compelling the employees to come to a negotiation in terms of their loyalty towards their company. It formed a perception that the personal gifts were provided as an endeavour towards exchanging the faithfulness of the employees in return of the large sums provided by the individual giver. Certainly, the exchange was viewed to be conflicting with the best interests of the company. All these factors led to the accumulation of debts for the company which made it impossible for WorldCom to repay and finally led to its collapse (Rosenbush, 2005). Conclusion From the above discussion, it can be lucidly comprehended that the fraudulent or inaccurate accounting practices and the projection of the inflated revenues led to the downfall of WorldCom. According to the financial experts, the accounting system or practice of the company, particularly those that were linked with the purchased businesses, made it quite complex for the investors to measure the actual challenges faced by WorldCom (Sridhar, 2002).. The factor of revisions with regard to its financial statements had thus turned to be a mere custom that was commonly followed within the company. The factor of profitability was further learnt to be overemphasised where the dearth of transparency in the daily operating performance intended to misguide the investors. All these stated factors accompanied by other secondary causes stated in the above discussion was learnt to be the accumulated reason behind the collapse of WorldCom. References Beresford, D. R. & et. al., 2003. Report of Investigation. FindLaw, pp. 1-340. Berglund, L., No Date. Practical Application Case; The Fraud at WorldCom 13:4. Scribd. [Online] Available at: http://www.scribd.com/doc/41475639/Fraud-at-WorldCom [Accessed May 30, 2012]. Elchenwald, K., 2002. For WorldCom, Acquisitions Were Behind Its Rise and Fall. The New York Times. Financial Reporting Council, 2010. The UK Corporate Governance Code. Documents, pp. 1-35. Kuhn, J. R. & Sutton, S. G., 2006. Learning from WorldCom: Implications for Fraud Detection through Continuous Assurance. Journal of Emerging Technologies in Accounting, Vol. 3, pp. 61-80. Moberg, D., 2010. WorldCom. Publications. [Online] Available at: http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html [Accessed May 30, 2012]. Moberg, D. & Romar, E., 2009. WorldCom Case Study. PRMIA, pp. 1-9. Ngoda, G., 2011. Advertising and Assurance Services. Scribd. [Online] Available at: http://www.scribd.com/doc/82534119/Audit-Term-Paper-Case-Study-of-Enron-WorldCom [Accessed May 30, 2012]. Pass, C., 2006. The Revised Combined Code and Corporate Governance: An Empirical Survey of 50 Large UK Companies. Working Paper Series, pp. 1-20. Romero, S. & Atlas, R. D., 2002. Worldcoms Collapse: The Overview; Worldcom Files For Bankruptcy; Largest U.S. Case. Archives. [Online] Available at: http://www.nytimes.com/2002/07/22/us/worldcom-s-collapse-the-overview-worldcom-files-for-bankruptcy-largest-us-case.html?pagewanted=all&src=pm [Accessed May 30, 2012]. Rosenbush, S., 2005. Five Lessons of the WorldCom Debacle. Tech. [Online] Available at: http://www.businessweek.com/technology/content/mar2005/tc20050316_9160_tc024.htm [Accessed May 30, 2012]. Sridhar, V., 2002. The WorldCom Collapse. Corporate Affairs. [Online] Available at: http://www.frontlineonnet.com/fl1915/19150810.htm [Accessed May 30, 2012]. Bibliography Anderson School of Management, 2011. WorldCom’s Bankruptcy Crisis. University of New Mexico, pp. 1-9. Brooks, L. J. & Dunn, P., 2009. Business & Professional Ethics for Directors, Executives & Accountants. Cengage Learning. Collier, P. M. M. & Agyei-Ampomah, S., 2009. CIMA Official Learning System Performance Strategy. Elsevier. Ferrell, O. & et. al., 2005. Business Ethics: Ethical Decision Making and Cases. Dreamtech Press. 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