WorldCom Scandal Case Study
In the year 1983, a gym teacher, Bernard John Ebbers, founded a tiny telecommunication company, which made it to 42nd place in the Fortune 500 companies and soon took over other large network providers such as UUNet, CompuServe and America Online. Bernard’s company, WorldCom, soon became one of the leading operators of internet infrastructure and largest long distance telephone service providers. Early investors and the founder of WorldCom became its chief executive officer (Lyke & Mark 2)
WorldCom becomes a noticeable business in the market and attracted many investors. The expansion and growth of the telecommunication company were extraordinary, and so was the rate of increase in its founder’s wealth. Ebber was reported to be worth more than $500 million during the 2000s (CNBC). In 1998, WorldCom merged with MCI Communication Corp. worth $40 billion; followed by a dramatic increase in the shares of WorldCom in 1999. It is recorded to have reached $64. WorldCom’s sales surged to $8 billion at the growth rate of 14%. International revenues also rose by 55% (CNBC).
Starting with only about $650,000 of capital, the leading telecommunication operator, soon accumulated a debt of $1.5 million because of the lack of expertise in handle accounts of large companies. However, Ebbers, who had the experience of a bartender, milkman and truck driver, led the company into incredible profits in less than a year. He focused on the internal growth of the organization. This strategy resulted in economies of scale that were crucial for the company’s expansion. WorldCom’s per unit costs dropped significantly and were able to generate revenue for mergers, which was Ebber’s best strategy for the firm’s success (Kaplan, Robert S. & Davi).
The merely experienced CEO, Ebbers, always aimed for high revenues and increasing the capacity for future growth. He believed in raising the share value which will lead to more investments and more revenue and profits; hence, improving his wealth status. He is reported to have said that the firm’s goals were not capturing the market share or expanding globally but to be the top stock on the Wall Street. The emphasize on revenues pushed WorldCom’s employees to do anything necessary for more revenues, even if it included long-term costs of a project outweighing the short-term gains.
The exception rate of growth of the business meant massive skill operation in different locations with thousands of employees. A former WorldCom accountant recalled that there were offices and people in the organization he never learned about. The company’s finance department maintained the corporate general ledger in the Mississippi headquarters. Ebbers was reported to have never included the legal department in any of the company’s functions and how it operated. He never gave importance to cooperate laws and a code of conduct for the whole organization. The accounting department was also misguided and lacked a set of rules and regulations to follow. Instead of providing it’s the financial, accounting and investor relations departments with a guide for the company’s policies, they were rewarded beyond the approved salary and bonus guidelines. It was a form of bribe for them to avoid interfering in the internal auditing of the firm (Kaplan, Robert S. & Davi).
In 1999, WorldCom’s attempt to merge with Sprint Corp. failed due to U.S Justice Department’s termination of the merger. It proved to be one the most significant events in the firm’s history since large-scale mergers were not an option for expansion goals any longer. It was very obvious that the organization began to fall apart as it lacked the vision for future and how it was to be managed. It was the top management that had issues and chose to exclude most of its employees in internal affairs.
The firm could no longer meet its revenue goals, in 2001. Scott D. Sullivan, Chief Finance Officer of WorldCom, asked his employees to maintain a 42% expense/revenue ratio which was declared to be impossible considering the position at that time. Nevertheless, Sullivan came up with the solution of treating operating costs as capital expenditure, which is against the international accounting principles and set up a hoax for investors. This new method of accounting manipulated revenues and profits, showing them way more than the true values. Accounting managers, Vinson and Troy, were asked to treat $828 million of line accruals in the Income Statement. That is when the firm was involved in using unfair means for its success, breaking several laws.
External auditor, Arthur Andersen, claimed that WorldCom was a “high-risk” client for committing fraud. Anderson could easily identify the accrual reversals and capitalization of expenses from the general ledgers, however, WorldCom ignored his requests and kept important information from him. The press blamed Anderson for his irresponsibility and turning a blind eye to the company’s abnormal financial statements (Yallapragada, RamMohan R., C. William Roe, & Alfred G. Toma 187).
In 2002, U.S. Securities and Exchange Commission requested WorldCom for information regarding accounting procedures and loans offered to officers. On 25th of June, the company announced that it would have to revise its financial statements as transactions worth $3.85 billion were mistreated. The discovery happened to shock all the investors of WorldCom and disappointed many stakeholders. The next day U.S SEC initiated a lawsuit against WorldCom for accounting fraud. U.S. Department of Justice launched an investigation on the actions of CEO, Bernie Ebbers, CFO, Scott Sullivan and a few other senior managers who were involved in the conspiracy.
Further investigation into the firm’s actions revealed capitalization of more than $11 billion of operating expenses. The company soon filed for Chapter 11 bankruptcy (the purpose of chapter 11 bankruptcy is to keep functioning in the market under court supervision) as investors pulled out their money and had its long-term corporate credit rating drop from B+ to CCC-.
In 2005, Ebbers was found guilty after six-week trial and sentenced to twenty-five years in prison, which is the longest a CEO has ever received. Senior managers of WorldCom including, David Meyers, Yates, Vinson, and Normand, pleaded guilty to felony charges of security fraud and making false files. Scott Sullivan pleaded guilty, as well, to committing fraud, misleading his employees and WorldCom investors and deceiving the SEC (Lyke & Mark 6).
WorldCom’s downfall is reported to be the biggest disappointment in the history of the stock market. Being a major contributor to the economy and one of the biggest telecom employer, WorldCom’s decline affected many stakeholders. The problem with the firm was there since the beginning. The CEO’s intentions of personal gains, lack of expertise and pressure on lower management led the firm into a conspiracy remembered to date.
Works Cited
Lyke, Bob, and Mark Jickling. “WorldCom: The accounting scandal.” Congressional Research Service Report for Congress, August. Vol. 29. 2002. Retrieved from:
http://wew.iwar.org.uk/news-archive/crs/13384.pdf
CNBC, David Faber. “The Rise and Fraud of WorldCom.” Msnbc.Com, 9 Sept. 2003, http://www.nbcnews.com/id/3072795/ns/business-cnbc_tv/t/rise-fraud-worldcom/.
Kaplan, Robert S., and David Kiron. Accounting fraud at WorldCom. Boston, MA: Harvard Business School, 2004. Retrieved from:
https://s3.amazonaws.com/academia.edu.documents/54585923/104071-PDF-ENG.pdf?AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1517555091&Signature=u26BqYvjkbFd914JUUzAUpCDNj4%3D&response-content-disposition=inline%3B%20filename%3DAccounting_Fraud_at_WorldCom.pdf
Akhigbe, Aigbe, Anna D. Martin, and Ann Marie Whyte. “Contagion effects of the world’s largest bankruptcy: the case of WorldCom.” The Quarterly Review of Economics and Finance 45.1 (2005): 48-64. Retrieved from: https://s3.amazonaws.com/academia.edu.documents/42359775/Contagion_effects_of_the_worlds_largest20160207-1934-s3599z.pdf?AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1517565101&Signature=7QZykd3QqbdytK2Hw9vvzkmWpgM%3D&response-content-disposition=inline%3B%20filename%3DContagion_effects_of_the_worlds_largest.pdf
Yallapragada, RamMohan R., C. William Roe, and Alfred G. Toma. “Accounting fraud, and white-collar crimes in the United States.” Journal of Business Case Studies (Online) 8.2 (2012): 187. Retrieved from: https://search.proquest.com/openview/06b53a065d495ed767827726fc0df367/1?pq-origsite=gscholar&cbl=2026883
