Individual Case Study-Worldcom
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 Highlights 1994 1999 2001 2004
Revenues $2.2 $37.1 $35.2 $20.7
Total Assets $3.4 $91.1 $103.9 $17.1
Employees $7.5 $97.6 $87.8 $40.4
Market Cap. $3.3 $150.5 $42.8 $6.4
Debt $0.8 $13.1 $30.0 $5.9
Total Capitalization $4.1 $163.6 $72.8 $12.3
Summary of Improper Income Statement amounts
(in millions)
1999 2000 2001 2002 Total
Revenues $205 $328 $358 $67 $958
Line Costs $598 $2,870 $3,063 $798 $7,329
Other Expenses $135 $676 $177 $(25) $428
Total $938 $3,874 $3,598 $840 $9,250
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
Strength:
• 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
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 Highlights 1994 1999 2001 2004
Revenues $2.2 $37.1 $35.2 $20.7
Total Assets $3.4 $91.1 $103.9 $17.1
Employees $7.5 $97.6 $87.8 $40.4
Market Cap. $3.3 $150.5 $42.8 $6.4
Debt $0.8 $13.1 $30.0 $5.9
Total Capitalization $4.1 $163.6 $72.8 $12.3
Summary of Improper Income Statement amounts
(in millions)
1999 2000 2001 2002 Total
Revenues $205 $328 $358 $67 $958
Line Costs $598 $2,870 $3,063 $798 $7,329
Other Expenses $135 $676 $177 $(25) $428
Total $938 $3,874 $3,598 $840 $9,250
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
Strength:
• 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