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WORLD COM

CASE SOLUTION
Team: Aziz Premji
Overview:

WorldCom Inc. began as a provider of long distance telephone service called


LDDS.
1996: Acquired MFS Communications (internet backbone)
1998: Acquired MCI
2000: Dotcom Bubble Burst (rapid decline in telecom stock values)
2002: Accounting Fraud uncovered
2002: Filed for Bankruptcy Protection
According to aWall Street Journalarticle
on Feb. 29, 1996,

WorldCom provided investors with returns of 57.3 percent a


year over the previous 10 years. The article states: "A $100
investment in WorldCom in 1989, for instance, would be worth
$1,580 by January; that, according to the company, is about 10
times the best return generated by WorldCom's primary
competitors, the Big Three of long distance: AT&T Corp., MCI
Communications Corp. and Sprint Corp.
How started(Fraud)?

WorldCom and other telecommunications firms have faced reduced demand as the dotcom boom
ended and the economy entered recession.

Revenues fall short of expectations, while debt remains.

Profits declined

Market value of the companys common stock plunged from about $150 billion in January 2000 to less
than $150 million as of July 1, 2002.
The Fraud was accomplished in two different ways:

1. 1-World coms accounting department underreported line costs by capitalizing


these cost on the balance sheet rather than properly expensing them.

2. 2-company inflated with bogus account entries from corporate unallocated


revenue accounts
What WorldCom did and How it was discovered?

What WorldCom Did? How it was discovered?

Reduced the amount of money held in reserve First, by WorldCom's own internal auditor, Cynthia
by $2.8 billion and moved this money into the Cooper - uncovered $3.8 billion of the fraud.
revenue line of its financial statements.
Later, Securities and Exchange Commission (SEC)
In 2000, classified operating expenses as launched an investigation.
long-term capital investments ( $3.85 billion).

These changes turned WorldCom's losses into


profits. It also made WorldCom's assets appear
more valuable.
Analysis of the Fraud:

Corporate Culture:
Autocratic style of management and followed a top down approach.

Lack of courage of employees to communicate the fraudulent activates believed it would have
cost them their jobs

A financial system in which controls were extremely deficient

The BOD and Audit Committee did not appear to have had an adequate understanding of the
company and culture Inadequate audits by independent auditors
Ethical Values Violated

Unethical Work Culture

Pressuring employees to manipulate accounts

Employees who played along were rewarded; others were


threatened.

Fudged up the accounts; mislead the various stakeholders.


Case Question #1: What are something's that world
com executives could have done to prevent the
accounting scandal

The main problem is not following the accounting principles . They should have
followed the following principle

Courage should have been developed by the employees and should not feel insecure
to highlight the issue to the internal audit team . Whistle blowing with third party
audits

Executives should have changed the autocratic culture during a small mistake or data
fudging activities

Accounting executives should do cross internal audit among the employees within
the same department, instead of a formal audit
Case Question #2:How could corporate ethics have
played a part in this failure ? How could they help to
bring a new and successful world com
Corporate culture is the main reason for this
failure. World com has followed an autocratic
culture, it means a top down approach. It made
all employees to accept the fraud and every one
were given targets to run over that

Corporate ethics should be adopted as follows to


bring a successful company

Strong Confidentiality in whistle blowing policies


As per the fraud triangle

Pressure From CEO to Executives

Rationalization some employees thought that


management is dishonest . Why should I Worry

Opportunity CEO thought that nobody can


Case Question #3:Give through update of world com
struggle to reorganize .What Penalties world com
executives paid for their part in the fiasco ? Do you
think these penalties are sufficient ?
Worldcom Struggle to reorganize

March 2003 ~ July 2003


A huge list of write downs and write ups in the telecom industry $80 billion in good
will, & 45 billion write off , property adjust $ 39.2 billion ..etc
Reorganize its accounting and finance team reporting structure directly reporting to
internal audit team

Penalties that executives paid are mostly losing their positions

Replacing board members who failed to prevent scandal


Firing many managers

Our Group Feels the Penalties to the executives who has done mistakes to support
frauds are not effective

They should have penalized higher amount by the share holders whose credit value
has been lost
Conclusion:

A good way to avoid management oversights is to subject the control mechanisms themselves to periodic
surprise audits

The point is to make sure that internal audits and controls are functioning as planned

It is a case of inspecting the inspectors and taking the necessary steps to keep the controls working efficiently

It is up to Top Management to send a clear & pragmatic message to all employees that good ethics is still the
foundation of good business