Behind the closed door

Topics: Revenue, MCI Inc., Bernard Ebbers Pages: 34 (14629 words) Published: September 21, 2014
Behind Closed Doors at WorldCom: 2001
Zekany, Kay E;Braun, Lucas W;Warder, Zachary T
Issues in Accounting Education; Feb 2004; 19, 1; ProQuest Central pg. 101

Behind Closed Doors at WorldCom: 2001
Kay E. Zekany, Lucas W. Braun, and Zachary T. Warder
ABSTRACT: WorldCom was a large telecom company that enjoyed an almost meteoric rise during the 1990s but ran into trouble in the early 2000s. 2001 was particularly difficult. This case gives future generations of accountants the opportunity to study the largest accounting scandal in history from an internal financial accounting perspective. To the extent possible, this case uses the actual "voices" of participants to gain an understanding of their viewpoints and motives. We get a chance to see some participants at their best and others at their worst. While our primary focus throughout this case is on the financial accounting issues, we also briefly touch on some of the safeguards available in preventing accounting fraud: internal controls, internal audit, external audit, and the Audit Committee. Throughout this case, you should ask yourself, "How would I respond if I were the corporate decision maker?"

INTRODUCTION

T

he year 2001 was a tumultuous time in the tclecom industry. In the midst of the turbulence, WorldCom's Board of Directors explained in the "Report oflnvestigation" the market conditions existing in 2001:

The number of competitive local telephone companies in operation dropped to 150 from 330 the previous year, and long distance caniers lost pr icing power and market share to the regional Bell and other local telephone companies. Many companies had entered the market for Internet services in the late 1990s, and the resulting expansion in network capacity led to a glut in the market. (Beresford ct al. 2003, 51)

At the same time, WorldCom's Chief Executive Officer, Bernard J. (Bernie) Ebbers, along with Mike Armstrong, Chief Executive Officer at AT&T, was at the top of Fortune magazine's list of "People to Watch 2001." This was true even though, according to Fortune, "Both run telecom companics with struggling consumer long-distance operations that are dragging down the company stock" (Birnbaum et al. 2001, 12). Unbeknownst to Fortune , there were other reasons to watch Bernie Eb bers and his management team that year . . . like a hawk.

BACKGROUND

WorldCom Is an Important Company
John Sidgmore, then a top WorldCom executive, lauded his company's achievements to the Committee on Financial Services of the U.S. House of Representatives: "We play a vital role in

Kay E. Zekany is an Assistant Professor; and Lucas W Braun and Zachw y T Warder are students, all at Ohio Northern University.
The authors thank Tom Howard (editor), Daniel Elkinson (editorial assistant), Linda Thome, Craig Lcshock , Professor Zekany's intermediate accounting stud en ts, a nd two anonymous reviewers for their usefu l comments.

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Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

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Zekany, Braun, and Warder

America's telecommunications infrastructure:
WorldCom is a strong, innovative company with tremendous assets. We have annual revenues of more than $30 billion, and even after our recent layoffs, we have more than 60,000 employees.
WorldCom has more than 20 million customers. On the residential side, our MCI phone service handles 70 million phone calls every weekend alone. And, tens of thousands of businesses depend on our services to support their mission-critical applications. WorldCom is the largest Internet carrier in the world. Our operations provide Internet services to some 100 countries on six continents.

WorldCom is a provider of network services for critical applications for the United States Government. These applications include the provision of customer service to 80 million Social Security beneficiaries, air traffic control applications for the Federal Aviation Administration,...

References: Beresford, D., N. Katzenback, and C. Rogers, Jr. 2003. Report of investigation by the Special investigative
Committee of the Board of Directors of World Com Inc
Bobhit, M. 2002. Minutes of the regular meeting of the audit committee oft he board of directors of WorldCom,
Inc
T. 2001. Email message to David Myers, copied to Louis Prestwood. March 6. Available at: http://
news.findlaw.com/hdocs/docs/worldcom/worldcom030602bdmin.pdf
Charan, R., J. Useem, and A. Harrington. 2002. Why companies fail. Fortune (Asia) (May 27): 36--45.
Cooper, C. 2002. WorldCom internal audit correspondence. June 24, !0:30AM. Available at: http://
news.findlaw.comlhdocs/docs/worldcom/worldcom062402intaud.pdf.
Dick, M. 2002. Andersen presentation, report to the Audit Committee, year ended December 31, 200 l.
Haddad, C. 2002. How Ebbers kept the board in his pocket. Business Week (October 14): 138-140.
Mehta, S. N. 2001. Can Bernie bounce back? Fortune (Asia) (January 22): 84-89.
Reaves, G. 2002. Accounting for anguish. Fort Worth Weekly Online (May 16).
Roberts, B. 2002. Wrong numbers: The accounting problems at WorldCom. Testimony before the House
Committee on Financial Services
Sidgmore, 1. 2002. Wrong numbers: The accounting problems at WorldCom. Testimony before the House
Committee on Financial Services
---. 2002. Untitled WorldCom "White Paper" internal memorandum. June 24. Available at: http:!/
news.findlaw.corn!hdocs/docs/worldcom/sulliv an0306012bdmin.pdf.
Thornburgh, D. 2002. First interim report of Dick Thornburgh, bankruptcy court examiner. In Re: WorldCom,
November 4
--. 2003. Second interim report of Dick Thornburgh, bankruptcy court examiner. In Rc: Wor/dCom, June 9.
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