History_of_Accounting_Regulation_in_Fiji

Case Details: WorldCom…. | | Case Code | : | FINC022 | . ThemesCorporate scams / Controversies | Case Length | : | 19 Pages | | Period | : | 1990 - 2002 | | Pub. Date | : | 2002 | | Teaching Note | : | Not Available | | Organization | : | WorldCom, Arthur Anderson | | Industry | : | Telecom, Financial Services | | Countries | : | USA | | Abstract:The case discusses the accounting frauds committed by the leading US telecommunications giant, WorldCom during the 1990s that led to its eventual bankruptcy. The case provides a detailed description of the growth of WorldCom over the years through its policy of mergers and acquisitions. The case explains the nature of the US telecommunications market, highlighting the circumstances that put immense pressure on companies to project a healthy financial position at all times. The case provides an insight into the ways by which WorldCom manipulated its financial statements. The case also describes the events that led the company to file for reorganization under Chapter 11 of the U.S. Bankruptcy Court in 2002. | | The role of the company's top management in the scandal has also been discussed. Finally, the case explores the initiatives being taken by the company to change its management structure, improve its performance and restore investor confidence. Issues: » Adverse business conditions often cause companies resort to unethical practices | | | | | | | | | | Corrupt corporate executives are no better than common thieves when they betray their employees and steal from their investors." - John Ashcroft (US Attorney General), in August 2002. "WorldCom put extraordinary pressure on itself to meet the expectations of securities analysts."1 - A report filed with the bankruptcy court, November 2002. Worldcom 2002: Yet Another Corporate Scam On June 26, 2002, the US-based telecommunications major WorldCom received unprecedented media coverage all over the world. Not for good reasons though. The company had earned the dubious distinction of being involved in the largest accounting scandal ever to hit the US corporate history. WorldCom had reportedly misrepresented its financial statements to an extent of around $ 4 billion. The company admitted that it had resorted to fraudulent accounting practices for five quarters (four quarters of 2001 and the first quarter of 2002). Soon after, WorldCom terminated the services of some of its top executives including Scott Sullivan (Sullivan), the Chief Financial Officer and David Myers, the Senior Vice President and Controller. The company's auditors held Sullivan responsible for the accounting mess and Sullivan was soon arrested on charges of fraud and misrepresentation. Adding fuel to the fire was the fact that Arthur Anderson was WorldCom's auditor while the inappropriate accounting was taking place.2 | | However, Arthur Andersen tried to wash its hands off the crisis stating that it was not aware of the accounting discrepancies. They accused Sullivan for withholding crucial information about book-keeping practices followed at WorldCom. With the sudden appearance of a $ 4 billion hole in its balance sheet, WorldCom was in an acute financial crisis. A severe cash crunch forced the company to layoff 17000 workers, which constituted 20% of its global workforce. Eventually, the financial crisis forced WorldCom to file for reorganization under chapter 113 of the Bankruptcy Code in July 2002., In August 2002, WorldCom shocked company observers and stakeholders yet again by reporting an additional improper reporting in its financial statements. This time around, the amount involved was $ 3.3 billion, carried out by manipulating the EBITDA4 during 1999-2001, and the first quarter of 2002. By late 2002, the extent of misappropriation by WorldCom was estimated to be well over $ 9 billion... From being one of the world's most valuable companies (valued over $ 100 billion at its peak), WorldCom came to be known as one of the biggest instances of the 'fraud wave' sweeping the global corporate world since the late 1990s. The company's downfall from WorldCom to 'WorldCon' is a story of a corporate feeding its greed through financial and accounting manipulations. Worldcom: The Company WorldCom was started by Bill Fields in Hattiesburg, Mississippi, in 1983 under the name 'Long Distance Discount Services' (LDDS), providing long distance telecommunication (telecom) services. The venture was profitable right from the start. In 1985, Bernie Ebbers (Ebbers) became the company's CEO. Ebbers reportedly played a major role in the success of LDDS in the following years. The company went public in 1989 when it acquired Advantage Companies Inc., a publicly traded long distance telecom services company. Throughout the 1990s, the company continued to grow by acquiring various companies and expanding its operations across the world (Refer Table I for the major acquisitions). | | In 1992, LDDS acquired Advanced Telecommunications Corp. In 1995, LLDS changed its name to WorldCom, as the management found the new name to be consistent with the company's future growth strategy of building a global presence through acquiring telecom-related companies across the world. In 1998, WorldCom bought the network units of America Online and CompuServe. However, WorldCom's biggest deal was that of acquiring Microwave Communication Inc (MCI)5 for an estimated $ 40 billion in the same year. The company now operated under the name 'MCI WorldCom.' To complete the merger that year, MCI sold its Internet access business to Cable & Wireless plc (a leading communication company), and British Telecommunications (BT) ended its partnership with the company and bought MCI's Concert Communication6 stake. Bert Roberts (Roberts), CEO-MCI was made the Chairman of MCI WorldCom, and Ebbers, the CEO... | | Worldcom: Genesis of the Frauds In the early 1990s, the US economy went through a phase of consolidation, in which many major companies acquired or merged with weaker companies to strengthen their own position in the market (as seen earlier, WorldCom happened to be one of the key acquirers in this phase). The share prices of companies play a vital role during mergers and acquisitions. Therefore companies try to 'maintain' the prices of their shares (that is, keep them sufficiently high). If they fail to do so, they can easily become targets for takeover/acquisition. Moreover, if a company wishes to raise capital from the market, its performance on the stock exchange is considered to be very important. The companies are generally valued on the basis of cash flows they could generate in future. As the financial performance of a company is one of the most important (and direct) factors affecting its share price, companies were under constant pressure to show positive revenue streams... | | Worldcom: The Ebbers Angle During the 1990s, Ebbers borrowed more than $ 1 billion for personal purposes from various banks. He pledged his WorldCom stock as collateral. When the prices of the WorldCom stock began declining in the early 21st century, Ebbers' lenders began pressurizing him to sell the stock and raise cash to support his loans. Reportedly, Ebbers decided to sell some of his shares in the company to meet these personal liabilities. However, fearing that the sale would result in a further drop in WorldCom's share prices, the company board decided to authorize loans to Ebbers so that he could pay off his debts. The company gave him loans to the extent of $ 408 million between 2000 and 2002. The company justified this by stating that it had to stop Ebbers from selling his stock in order to prevent a fall in the share prices of WorldCom... Worldcom: The Final Countdown As media, legal and investor unrest intensified against WorldCom, there was little hope left for the company. The company was required to pay $ 172 million in interest and debt in 2002, which was to increase further to $ 1.7 billion and $ 2.6 billion as a part of the repayment schedule in 2003 and 2004. Analysts remarked that the company, which had a negative cash flow of $ 871 million in 2001, would be able to generate only $ 564 million in free cash flow in 2002 and $ 1 billion in 2003. Considering the situation, many company observers predicted that the company would soon declare itself bankrupt. On April 19, 2002, the company revised its financial predictions for the year 2002, citing a downturn in the long distance consumer business. WorldCom announced that its revenues would range between $ 21 billion to $ 21.5 billion, as against the earlier projection of $ 22 billion. The overall revenues were supposed to drop by 5%. Similarly, the net income was expected to fall by 40% (to $ 1.6 billion approximately)... Worldcom: Lessons From the Saga WorldCom had an audit committee consisting of 11 directors (refer Exhibit V for the board's composition), eight of whom were independent. The objective of the audit committee was to review the company's financial statements, monitor internal accounting control activities, communicate with the company's external auditors and review internal accounting control activities. However, media reports claimed that WorldCom's board of directors failed to fulfill their basic responsibilities. Analysts also felt that apart from inefficient corporate governance practices followed by the company, the naivety of the investors was also equally responsible for the crisis. They felt that the investors should have demanded for more transparency in the accounting systems... Worldcom: The Aftermath In November 2002, Michael D. Capellas (Capellas, Former President, Hewlett-Packard) was appointed as the Chairman and CEO of WorldCom. Despite the bankruptcy proceedings and the legal troubles, WorldCom officials seemed rather positive about the company's future. John Sidgmore (Retiring CEO) said that the company's focus would be on reorganizing, regaining financial strength, and operating with the highest integrity. He also said that the company would emerge from chapter 11 as quickly as possible and with their competitive spirit intact...