Analysis of The Worldcom Case
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ScribdTranslationsAnalysis of The Worldcom Case
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ScribdTranslationsANALYSIS OF THE WORLDCOM CASE
How was the Fraud discovered?
Stock Market
Banking Market
Telecommunications Market
Capital Market
Among the specific instruments used by the company are those of a character
accountable
Underreporting in the 'cost line' (interconnection expenses with other companies)
telecommunications) by capitalizing these costs on the balance sheet and not as an expense
appropriately.
Inflating income with false accounting entries for corporate revenue accounts not
assigned.
Financial Information Supplies (executives, board members of
administration, auditors, analysts, regulators, investors or shareholders even the
own media) the accounting data of WorldCom during 2001 and
the first half of 2002 was manipulated and did not reflect the real situation of the
the question undoubtedly is what happened to the control organisms or institutions
and the role they played, in this way the Andersen Auditor came to be at the center
of the scandal thus ending years of prestige.
Investors often take a company's annual report and believe without a doubt.
in everything that is stated in it. Consequently, to mitigate the risk, the following must be done:
1. Compare companies in the same industry and sector. For example, are they
are the leasing conditions similar? Are the debt forecasts similar? In the
the case of WorldCom could be compared to the evolution of capitalization of the
investments and expenses in investments between companies. However, it is still
quite difficult to detect fraud because companies do not provide information
detailed about the specific evolution of expenses and capital investments.
2. Analyze the evolution of cash flow in relation to the calculated profits according to
the 'generally accepted accounting principles'. If there is a wide and growing
divergence between these figures, it is a warning signal that the managers
they may be manipulating those figures.
A very useful warning signal that often appears in these situations is the
existence of recent disagreements between the company, its managers, and their companies
professional advisors. For example, has the company changed recently?
auditors or legal advisor? Have high executives recently left the
company under suspicious circumstances?, Has any high executive left?
due to possible disagreements about aggressive accounting methods of the
sales figures?
Measures to mitigate risk
The company filed for bankruptcy protection in July 2002, was restructured and
rebranded as MCI, to exit the bankruptcy in April 2004. The accounting maneuvers
to hide losses, they brought down the telecommunications giant, for which
he decided to reduce his workforce by 17 thousand people, that is, more than 20 percent.
hundred of its employees. An agreement was reached with its creditors that will allow it to exit
from bankruptcy. The company that will be renamed MCI has submitted a plan to
United States Bankruptcy Court plans to reduce $30 billion in debt
from dollars to 4.5 billion dollars and drastically reduce its expenses in order to
compete directly against its main rivals, led by AT&T. As for
In the future of WorldCom, it was ensured that it aimed to sell part of the 70 firms.
acquired by Ebbers in his reckless growth career and that would be detached from
unprofitable businesses in Ibero-America and Asia. In May 2005, the new executive of
the company decided to sell its telecommunications network assets to the giant Verizon.
In 2002, a small team of internal auditors at WorldCom, led by
by Cynthia Cooper, who generally had to work at night in secret, were
those who investigated and uncovered 3.8 billion USD in the fraud. Shortly after,
the company, the audit committee, and the board of directors were notified and acted
quickly, dismissing Sullivan, Myers on his side resigned and Arthur Andersen
(auditing firm) withdrew its audit report corresponding to the year 2001.
On June 25, 2002, WorldCom admitted to inflating its earnings by 3.800.
millions of dollars, on June 26 of the same year the Security Commission and
Stock Exchange charges fraud against WorldCom and the 21
July 2002
WorldCom, overwhelmed with a debt of 30 billion dollars, seeks protection.
due to bankruptcy, being the largest corporate bankruptcy case in history.
Bernard Ebbers
Background
Conclusion
Markets and Instruments that intervened
The ethics of each person and business must go hand in hand to ensure good outcomes.
future results for any organization, when this bond does not exist, then
there is chaos or an imbalance in the way of proceeding in the face of dilemmas
businesses of daily life.
Measures Taken
WorldCom
The mismanagement of the company's accounts began in the year 2000, the year in which the
the telecommunications sector entered into crisis, the company's attempt to present itself
the solvent led me to carry out several fraudulent maneuvers.
In July 2002, the scandal broke out when it became known that the executives had
manipulated the accounts and recorded losses for three years, during which they said
having obtained profits. During 2001 and the first quarter of 2002, the company
it reported profits of 1.4 billion dollars and 130 million respectively,
distorting reality by creating benefits much greater than the real ones.
The accounting fraud consisted of recording some expenses as capital investments.
corporate, delaying over time the impact on the income statement, which to
despite not affecting the company's flow, it made it show profits instead of
losses. Hiding a financial hole of 11 billion dollars by means of the
investment expense accounts.
In the year 1996, the Federal Communications Commission (FCC) enacted the Law
of Telecommunications to open up to competition the previously existing monopoly of
State. This act constituted a struggle on the part of the companies of
telecommunications to gain market position.
Four companies entered into a contract to operate at points.
specific. Sprint acquired the possession of New York, MFS DataNet obtained
Washington and San José, San Francisco was allocated to Pacific Bell and Ameritech was left with.
Chicago. In 1996 MFS DataNet was absorbed by UUNet (WorldCom).
During 1997, 80% of the market was controlled by five companies: Sprint, MCI,
BBN (from GTE), ANS (subsidiary of AOL) and UUNET.