Individual Case Study-Worldcom

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Executive Summary

Accounting Issues: Fraudulent Accounting Practices

$11 Billion Accounting Fraud over 3 years (1999 – 2002) by understatement of operating expenses of $7B through improper release of accruals and improper capitalization of operating expenses

management promoted culture fixed on the numbers

board of directors' failure to scrutinize billion-dollar acquisitions

excessive loans to executives in order protect stock prices

Financial Overview of WorldCom
(in Billions)
Financial Highlights1994199920012004
Total Assets$3.4$91.1$103.9$17.1
Market Cap.$3.3$150.5$42.8$6.4
Total Capitalization$4.1$163.6$72.8$12.3

Summary of Improper Income Statement amounts
(in millions)

Line Costs$598$2,870$3,063$798$7,329
Other Expenses$135$676$177$(25)$428

Impact of Fraud:

$180B of shareholder value lost
$37.5B of debt and preferred stock holder value lost
$750M settlement to the SEC
57,000 employee jobs lost
12 board of directors agreed to pay a total of $25M out of pocket


Demand for Telecom services
High Stock Price

How It Happened (Weaknesses):

Lack of Internal Controls- Ebber and Sullivan dominated WorldCom with virtually no checks and constraints placed on their actions •Management Promoted an atmosphere of numbers
Employees feared for their jobs
Financial system in which controls were extremely deficient •Board of Directors and Audit Committee did not have adequate understanding of the company and culture •No audits by independents auditors

How It Could've Been Prevented (Detailed Solution):

the CEO and auditor of your business should review documentation of how your accounting systems work, and identify what controls are in place and who has...
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