The WorldCom Scandal Contents Key elements at WorldCom………………………………………………………………………3 Corporate Governance Issues at WorldCom…………………………………………….........4 UK Corporate Governance...................................................................................…...5, 6 Conclusion………………………………………………………………………………………… 6 References………………………………………………………………………………………….7 Key Elements at WorldCom WorldCom began as a small provider of long distance telephone service. During the 1990s, the firm made a series of acquisitions of other telecommunications firms that boosted its reported revenues from $154 million in 1990 to $39.2 billion in 2001 (Lyke and Jickling, 2002). The economic problem was that WorldCom had a vast supply in telecommunications capacity that emerged in the 1990s, as the industry rushed to build fibre optic networks and other infrastructure based on overly optimistic projections of Internet growth (Lyke and Jickling, 2002) By 2001 the telecommunications market was softening; meaning prices were falling due to an excess of supply and a decrease in demand as the dot com boom ended. WorldCom had already signed contracts with third party telecommunication companies promising to complete their calls. These multi billion dollar contracts were actually costing more in expenses than what the company would or was receiving in revenue (Sandberg, Solomon, & Blumenstein, 2002). In 2002, WorldCom’s bankruptcy was the largest in US history; WorldCom admitted that it had falsely booked $3.85 billion in expenses to make the company appear more profitable. Ebber who was CEO of WorldCom created fictitious some more than questionable accounting practices. Thus began the practice of taking an operating expense and reclassifyin... ... middle of paper ... ...practice. The changes were made so issues that occurred in the WorldCom scandal are prevented through greater transparency of financial information, internal control, and the protection of shareholders. References Lyke, B and Jickling, M. (2002). WorldCom: The Accounting Scandal. CRS Report for Congress, p2. Sandberg, J., Solomon, D., & Blumenstein, R. (2002, June 27). Accounting Spot-Check Unearthed A Scandal in WorldCom's Books. Retrieved from The Wall Street Journal: http://online.wsj.com/article/SB102512901721030520.html Solomon, J (2013). Corporate Governance and Accountability. 4th ed. Sussex: John Wiley & Sons Ltd. p.7, p9, p10, p15, p58, p60, p253. Nottingham Trent University. (2013). Lecture 1 - An Introduction to Corporate Governance. Available: https://now.ntu.ac.uk/d2l/le/content/248250/viewContent/1053845/View. Last accessed 16th Dec 2013.
While Enron was the complicated fraud, WorldCom fraud was the simplest one to commit. WorldCom which is now known as MCI and acquired by Verizon Communication since 2006 was founded in 1983 to create a discount long-distance provider. The company grew very rapidly in the 1990s because of several large acquisitions (Beresford, Katzenbach, & C.B. Rogers, 2003) WorldCom completed 3 mergers in 1998 and one of the merger was the acquisition of MCI Communications Inc for $40 billion, the largest merger at that time. WorldCom also merged with Brooks Fiber Properties Inc for $1.2 billion and CompuServe Corp for $1.3 billion (The rise and fall of WorldCom, 2008). WorldCom announced the merger with Sprint Corp. in 1999 and its shares’ price went up for more than $64 but, the merge was blocked by regulators in both the U.S. and Europe because they concerned that it would create a monopoly in 2002 (The rise and fall of WorldCom,
Madura, Jeff. What Every Investor Needs to Know About Accounting Fraud. New York: McGraw-Hill, 2004. 1-156
It has been noticed that during the accounting scandal of WorldCom, journal entries in the amount of $150 million and $771 million, respectively, were made by two General Accounting employees – Dan Renfroe and Angela Walter—without detailed support. Although, this was not out of the ordinary at WorldCom, this is not a correct accounting practice as it is against the basic principles of bookkeeping and accounting. This is because detailed support in the form of documentation is the key element in providing support to a journal entry and explains the reason or purpose why the journal entry was created in the first place. Such support is very important and relevant from the point of view of the persons reviewing the journal entry and those intending to approve the journal entry. Most importantly, it is extremely relevant and essential from the point of view of external auditors of the company or business. Thus, such support or related documentation enables the reviewer or approver to assess and acknowledge the completeness, reasonableness, accuracy, and appropriateness of the journal entry.
Years later, the Telecommunication Act of 1996 triggered dramatic changes in the competitive landscape. SBC Communications Inc. established itself as a global communications provider by acquiring Pacific Telesis Group and becoming the new AT&T. The merger of AT& T and BellSouth, along with the ownership consolidation of Cingular Wireless and YELLOWPAGES.COM, will speed convergence, competition and continued innovation in the communications and entertainment industry, creating new solutions for consumers and businesses and positioned to lead the industry in one of its most signifi...
The telecommunications industry is of vital importance to the development of the information-based economy. AT&T need to supply access to cost efficient, timely and innovative telecommunications services.
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
This report gives the brief overview of the concept of corporate governance, its evolution and its significance in the corporate sector. The report highlights various key issues and concerns that are faced by the organizations while effectively implementing and promoting Corporate Governance.
Giroux, G. (Winter 2008). What went wrong? Accounting fraud and lessons from the recent scandals. Social Research, 75, 4. p.1205 (34). Retrieved June 16, 2011, from Academic OneFile via Gale:
“Enron incorporated “mark-to-market accounting” for the energy trading business in the mid-1990s and used it on a huge scale for its trading transactions. These rules, when companies have outstanding energy-related or other derivative contracts (either assets or liabilities) on their balance sheets at the end of a particular financial quarter must be adjusted to fair market value, declaring unrealized gains or losses to the Balance Sheet of the period” (C. William Thomas, 2002). Andrew Fastow, the CFO, The CEO Jeff skilling and its former ...
Bibliography: Turnbull, S. (1997). Corporate governance: its scope, concerns and theories. Corporate Governance: An International Review, 5 (4), pp. 180--205.
Corporate governance changed drastically after the case of Andersen Auditors, Enron’s auditing service showed that they contributed to the scandal. Andersen was originally founded in 1913, and by taking tough stands against clients, quickly gained a national reputation as a reliable keeper of the people’s trust (Beasley, 2003). Andersen provided auditing statements with a ‘clean’ approval stamp from 1997 to 2001, but was found guilty of obstructing justice by shredding evidence relating to the Enron scandal on the 15th June 2002. It agrees to cease auditing public companies by 31 August (BBC News, 2002).
Securities Commision Malaysia. (2014). General Article: Corporate Governance. Retrieved March 26, 2014, from Securities Commision Malaysia: http://www.sc.com.my/corporate-governance/
Auditing has been the backbone of the complicated business world and has always changed with the times. As the business world grew strong, auditors’ roles grew more important. The auditors’ job became more difficult as the accounting principles changed. It also became easier with the use of internal controls, which introduced the need for testing, not a complete audit. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. Computers played an important role of changing the way audits were performed and also brought along some difficulties.
The Tyco accounting scandal is an ideal illustration of how individuals who hold key positions in an organization are able to manipulate accounting practices and financial reports for personal gain. The few key individuals involved in the Tyco Scandal (CEO Kozlowski and CFO Swartz), used a number of clever and unique tactics in order to accomplish what they did; including spring loading, manipulating their ‘key-employee loan’ program, and multiple ‘hush money’ payouts.
The office of the Director of Corporate Enforcement (ODCE, 2015), Ireland defines Corporate Governance as “the system, principles and process by which organisations are directed and controlled. The principles underlying corporate governance are based on conducting the business with integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions and complying with all the laws of the land”. It is the system for protecting and advancing the shareholder’s interest by setting strategic direction for the firm and achieving them by electing and monitoring the capable management (Solomon, 2010). It is the process of protecting the stakes of various parties that have their interest attached with a company (Fernando, 2009). Corporate governance is the procedure through which the management of the company is achieving the goals of various stake holders (Becht, Macro, Patrick and Alisa,