Accounting Scandal of WorldCom

WorldCom is a telecom company created by the great merger of MCI Communications and WorldCom. In the United States, the company was ranked second largest distance among the telecommunications company. UUNET and WorldCom have built a merger, with UUNET well known as the backdrop for the network. Its headquarters was initially located in Clinton but later in Virginia. After its big accounting scandal, this widely-known corporation fell in bankruptcy (Lyke, B., & Jickling, M. 2002).

Company History

WorldCom known as MCI Inc. founded in 1983 was a telecommunication company located in Clinton which offered long distance telephone service (Kahaner, 1986). The Chief Executive Officer of the Company appointed in 1985 was Bernard Ebbers. The company was named WorldCom Inc. the year of 1995 after it bought William Telecommunications for a price of 2.5 billion dollars. It made its biggest merger in 1998 after buying MCI Communications Inc. for 37 billion dollars. Merged with a corporation in the year 1999 named as Sprint which was later blocked by both U.S. and Europe regulators with the fears that company has become too big. The operations of the company are divided into three divisions:

MCI WorldCom-provides data, local phone service, internet and communication services.

UUNET WorldCom provides local internet access in more than 1000 locations in countries like U.S and Canada among many others.

WorldCom International in countries like Australia, Singapore, the U.K. just listing a few it connects to the company networks more than 5000 buildings.

Accounting Issues

The company’s prosperity stopped when false reports were discovered that seemed fraudulent. The company had more than $9bn false entries in the financial systems for them to achieve the financial results that were reported. There was an incorrect recording of 3.3 billion dollars recorded as profits from the year of 1999 to 2002 first quarter. (Tran, 2017).

WorldCom had incorrectly accounted for approximately $3.8bn in expenses. Profits reported from 2001 to the first quarter of 2002 were erased due to the cash flows of 3.055 billion dollars, and 797 million dollars from 2001 and 2002 respectively had to be removed from the books. The incorrect records were brought about by internal transfers in the capital expenditure and expense accounts and large loans to the company which summed up to $400 million. The $3.8bn were recorded as capital assets instead of line cost expenses. The greatest public company loan to the CEO Ebbers of 341 billion dollars was discovered.

Treatment to Prevent Accounting Scandal

First of all, they would have reduced the dictatorial powers of the Chief Executive Officer through the board of directors to ensure no employee trying to report fraud activities is fired by CEO. Established a reporting system that would enable employees to reports activities of fraud. When internal auditor Cynthia Cooper said, action was taken only until the audit.

The CEO and directors should have been made to disclose their compensation plans to the stakeholders and their personal benefit. The CFO was involved in the fraud due to personal benefits.

Problem Discovery and Penalties Awarded

An internal audit, 2002, led to the discovery that WorldCom had made transfers that were unacceptable by the generally accepted accounting principles (GAAP). SEC requested WorldCom to hand in documentation connected to those transfers.

The SEC filed fraud charges against the company on June 26, 2002, that affected WorldCom’s stock price. Officials were put under investigations which led to CEO Bernie Ebbers resigned in April 2002, and senior vice president David Myers left too. The Chief Financial Officer Scott Sullivan was fired, pleaded guilty and got a lifetime ban as an officer.

Stakeholders Affected By Scandal

The company’s investors were concerned since the stock price of shares went down drastically from 15 dollars to 0.20 dollars due to the charges against WorldCom. The company’s employees were also affected since within some few days a total number of 17000 were fired to save 900 million dollars for the company yearly.

Conclusion

Based on the knowledge above, it is evident that WorldCom Accounting Scandal was brought about by the top management officials trying to maintain the status of the company. In the U.S. If the accurate financial reports were made it would have been a significant loss to the company due to the incompetence of officials in the company and dictatorial powers vested in them. Also, accounting scandal is fraudulent activities which make corporations and other management officials bankrupt and even face jail terms. Therefore, it is important to use the accepted standards to avoid such cases. Also authorities various countries should provide strict policies which control and govern accounting officials in their daily procedures so that similar scandals may be prevented in the future. Finally, corporates and businesses should practice or have habits that are ethical to accounting activities, are according to company culture, values and norms so that there could be a good relationship in workplace and prevent future accounting desires. Moreover, students and other scholars associated with accounting and finance should be trained on better accounting practices.

References

Kahaner, L. (1986). On the line: The men of MCI--who took on AT & T, risked everything, and won!. New York, NY: Warner Books.

Lyke, B., & Jickling, M. (2002, August). WorldCom: The accounting scandal. In Congressional Research Service Report for Congress, August (Vol. 29).

Tran, M. (2017). WorldCom accounting scandal. the Guardian. Retrieved 21 February 2017, from https://www.theguardian.com/business/2002/aug/09/corporatefraud.worldcom2