WorldCom and Accounting Ethics
ACC557 Assignment #1
April 29, 2013
Dr. Mohammad Rahman
Current business and regulatory environments are more conducive to ethical behavior due to many new laws that have been put into effect in recent years. For many companies, especially small ones, the checks and balances are not put into place as well as they should be. With new laws in effect and more and more accountants paying attention to their clients’ accounts, ethical behavior is on the rise although it will take a long time to recover from the scandals that rocked the world beginning with Waste Management in 1998 and following with Enron, WorldCom, Tyco, HealthSouth, Freddie Mac, AIG, Lehman Brothers, Bernie Madoff and Saytam in 2009. For 10 years unethical behavior and choices almost brought our country to its knees and even now many people are losing their homes and their jobs because the economy has still not fully recovered.
In 1983 in a small coffee shop in Hattiesburg, MS, the business concept that would become WorldCom was born. The company was to become one of the largest telecommunications companies that would one day rival AT&T.
WorldCom began as a small long distance telephone company and through an aggressive acquisition strategy, evolved in the second-largest long distance telephone company in the United States and one of the largest companies handling worldwide Internet data traffic. WorldCom achieved its position through a large number of acquisitions and between 1991 and 1997, WorldCom spent almost $60 billion in the acquisition of many of these companies and accumulated $41 billion in debt.
With each acquisition, WorldCom’s stock continued to rise as the company became more noticeable, rising from pennies per share to over $60 per share in 1997. As the company grew people sat up and took notice and Wall Street investment banks as well as analysts and brokers began making buy recommendations to investors worldwide.
All of this would have ended well if WorldCom had obviously played by the rules but alas, that was not the case. As with any acquisition, let alone 65 of them in six years, management at the top level requires considerable attention to make the merging of the two companies run smoothly. Secondly, the accounting of the financial aspects of each merging company must be accomplished through the application of generally accepted accounting practices (GAAP).
WorldCom’s merger with MCI was the beginning of the end. Bernie Ebbers (CEO) paid little attention to the details of the operations and many things began deteriorating, mainly customer service. Customers were told they were not customers, computer systems conflicted with each other and billing systems were not coordinated – a recipe for disaster. Although WorldCom had an immense talent for buying competitors, it was not up to the task of merging them.
WorldCom also used their own interpretation of accounting rules when preparing financial statements. “In an effort to make it appear that profits were increasing, WorldCom would write down in one quarter millions of dollars in assets it acquired while, at the same time, it “included in this charge against earnings the cost of company expenses expected in the future. The result was bigger losses in the current quarter but smaller ones in future quarters, so that its profit picture would seem to be improving.” (Moberg)
WorldCom managers also made their own assumptions regarding accounts receivables which if the money customers owe the company. They chose to ignore the accounts receivables because this allowed for a lower assumption of non-collectable bills which in turn required a smaller reserve fund. The end result allows for higher earnings.
All of these practices could continue as long as WorldCom continued to acquire additional companies, using those companies as their “merry-go-round” to utilize poor accounting practices. Not only poor practices but...
References: JJ. (2007). WorldCom Scandal: A Look Back At One Of The Biggest Corporate Scandals In U.S. History. Retrieved April 26, 2013 from: http://voices.yahoo.com/worldcom-scandal-look-back-one-biggest-225686.html?cat=3Moberg, D. & Romar, E. WorldCom Case Study. Retrieved April 27, 2013 from: http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.htmlWeygandt, J., Kimmel, P., Kieso, D. (2012). Financial Accounting. WorldCom News: Questions, Answers and Updates. Retrieved April 26, 2013 from: http://www.worldcomnews.com/index.html |
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