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    World Com Case Solution: Team: Aziz Premji

    Uploaded by

    Kumara Raja
    WorldCom began as a long distance provider and grew through acquisitions but faced financial troubles as the dot-com bubble burst. To hide losses, WorldCom fraudulently capitalized line costs instead of properly expensing them, inflating reported profits by $3.85 billion. An internal auditor uncovered the fraud, leading to an SEC investigation and WorldCom filing for bankruptcy in 2002. Executives could have prevented this by changing the autocratic culture, empowering whistleblowers, and adopting strong ethics policies. Penalties for executives were largely just job losses rather than financial penalties, which some feel were insufficient given the scale of value lost by shareholders.

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    World Com Case Solution: Team: Aziz Premji

    Uploaded by

    Kumara Raja
    36 views12 pages
    WorldCom began as a long distance provider and grew through acquisitions but faced financial troubles as the dot-com bubble burst. To hide losses, WorldCom fraudulently capitalized line costs instead of properly expensing them, inflating reported profits by $3.85 billion. An internal auditor uncovered the fraud, leading to an SEC investigation and WorldCom filing for bankruptcy in 2002. Executives could have prevented this by changing the autocratic culture, empowering whistleblowers, and adopting strong ethics policies. Penalties for executives were largely just job losses rather than financial penalties, which some feel were insufficient given the scale of value lost by shareholders.

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    WORLD COM

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    WORLD COM

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    WorldCom began as a long distance provider and grew through acquisitions but faced financial troubles as the dot-com bubble burst. To hide losses, WorldCom fraudulently capitalized line costs instead of properly expensing them, inflating reported profits by $3.85 billion. An internal auditor uncovered the fraud, leading to an SEC investigation and WorldCom filing for bankruptcy in 2002. Executives could have prevented this by changing the autocratic culture, empowering whistleblowers, and adopting strong ethics policies. Penalties for executives were largely just job losses rather than financial penalties, which some feel were insufficient given the scale of value lost by shareholders.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    36 views12 pages

    World Com Case Solution: Team: Aziz Premji

    Uploaded by

    Kumara Raja
    WorldCom began as a long distance provider and grew through acquisitions but faced financial troubles as the dot-com bubble burst. To hide losses, WorldCom fraudulently capitalized line costs instead of properly expensing them, inflating reported profits by $3.85 billion. An internal auditor uncovered the fraud, leading to an SEC investigation and WorldCom filing for bankruptcy in 2002. Executives could have prevented this by changing the autocratic culture, empowering whistleblowers, and adopting strong ethics policies. Penalties for executives were largely just job losses rather than financial penalties, which some feel were insufficient given the scale of value lost by shareholders.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 12

    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

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