Running head: CASE ANALYSIS OF THE ACCOUNTING FRAUD AT WORLDCOM
Case Analysis of the Accounting Fraud at WorldCom
October 27, 2008
The origin of WorldCom can be traced back to 1983. The CEO, Bernard J. Ebbers, of WorldCom had very interesting beginnings. He invested in Long Distance Discount Services (LLDS) with eight other investors, and believed that the telecommunications industry was a very good business venture. In the beginning the lack of technical experience of the LLDS proved to be detrimental by creating a great deal of debt. The company enlisted Bernard J. Ebbers to create a sound and solid business. Ebbers proved himself to the company and others in the industry that he was a force to be reckoned with and turned the business profitable in less than a year’s time. Ebbers did not have a degree in business from any elite school. He had a very humble beginning with cost cutting at the forefront and a desire to make change within the industry. In 1995, the company publicly became known as WorldCom. By 1998, Ebbers and his Chief Financial Officer, Scott Sullivan, who was the brains behind the MCI merger, received accolades and were recognized by analysts as industry torch bearers. As the years progressed and the company grew larger, problems began to arise. The problems that WorldCom encountered could not have been predicted by any of the stockholders. In 1999, WorldCom tried to attain Sprint, but the merger was terminated, which led to the beginning of the end for WorldCom. On July 21, 2002, WorldCom Group filed bankruptcy, which was due to deliberately overstating tax income. The Culture
WorldCom’s company culture was extremely oppressive. The advent of expanding the company led to pitfalls that management did not address. WorldCom acquired different companies and continued to manage the companies that they obtained as separate entities. The disconnection of the departments within the company impeded the performance and governance of the WorldCom. Ebbers’ attitude towards corporate governance spearheaded the less than favorable climate of the company. Upper management only wanted to dictate the employees. The employees did not have any way of reporting grievances. The chain of command only flowed downward. Employees did not feel at liberty to disclose inadequacies within the company, because the lack of the code of conduct that Ebbers felt was a waste of resources to pursue. If Ebbers had fostered a culture where employees at all levels followed a chain of command when reporting issues, several problems could have been alleviated or at least Ebbers would have had knowledge of all of the inadequacies of the firm. Sullivan, CFO, took advantage of the lack of a direct chain of command and ran the business how he wanted to do so. Upper management used intimidation and scare tactics to gain what they wanted from employees. The threats and language that Buddy Yates, director of WorldCom General Accounting, used when speaking to the Gene Morse, senior manager at WorldCom’s internet division, was not professional neither ethical. Threats should have been reported and dealt with accordingly. Employees that were loyal and did what they told, especially the ones that worked in accounting, finance, and investment departments received compensation for their duties. Compensation to those employees in those departments equated to “hush mouth” money. Ebbers and Sullivan were both aware of the downward turn the company was taking and wanted to make sure to keep the employees that were privileged to the financial information, was kept happy. Often time’s people will keep quiet for the right price. The Beginning of the End
The external environment that WorldCom faced during 1999-2001 was grim. The telecommunications industry had taken a nosedive. The competition was fierce and the demand for telecommunications declined....
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