Accounting Fraud at Worldcom 2
Accounting Fraud at WorldCom
Vanessa Gail Woods
Strayer University
Connor-Green/ACC 576
March 21, 2010
Accounting Fraud at WorldCom The break up of AT&T opened the long distance service market to small companies during the mid- to late-1980s and 1990s. Long Distance Discount Service (LDDS) opened in 1983 with moderate growth until its stock went public in 1989. CEO Bernie Ebbers decided to grow the organization through acquisitions (70 companies over the course of its lifetime) with its largest in 1998, the acquiring of MCI for $37 billion. The acquisitions caused the company’s stock to increase and WorldCom used this strategy to fund additional acquisitions. Each company came with vast amounts of debt until the company had accumulated over $30 billion of debt. WorldCom then created an accounting category labeled “good will” to hide the fact that liabilities greatly exceeded assets. The culture at WorldCom was fractured.
Corporate culture Several aspects of the corporate culture contributed to the accounting fraud. While external stakeholders were willing to follow WorldCom for their share of the profits the culture within the organization was steeped in management secretly withholding financial facts from its board of directors and auditors. The lack of corporate governance promoted a culture that “implicitly forbid scrutiny and detailed questioning.” (1) Failure of the board of directors to carefully examine billion-dollar acquisitions supported by management was another tear in the corporate culture. “Its culture was dominated by a strong chief executive officer, who was given virtually unfettered discretion to commit vast amounts of shareholder resources and determine corporate direction without even the slightest scrutiny or meaningful deliberation or analysis by senior management or the board of directors.” (1) The trail of accounting fraud had begun based on one man’s understanding of what mattered to Wall Street investors and
Vanessa Gail Woods
Strayer University
Connor-Green/ACC 576
March 21, 2010
Accounting Fraud at WorldCom The break up of AT&T opened the long distance service market to small companies during the mid- to late-1980s and 1990s. Long Distance Discount Service (LDDS) opened in 1983 with moderate growth until its stock went public in 1989. CEO Bernie Ebbers decided to grow the organization through acquisitions (70 companies over the course of its lifetime) with its largest in 1998, the acquiring of MCI for $37 billion. The acquisitions caused the company’s stock to increase and WorldCom used this strategy to fund additional acquisitions. Each company came with vast amounts of debt until the company had accumulated over $30 billion of debt. WorldCom then created an accounting category labeled “good will” to hide the fact that liabilities greatly exceeded assets. The culture at WorldCom was fractured.
Corporate culture Several aspects of the corporate culture contributed to the accounting fraud. While external stakeholders were willing to follow WorldCom for their share of the profits the culture within the organization was steeped in management secretly withholding financial facts from its board of directors and auditors. The lack of corporate governance promoted a culture that “implicitly forbid scrutiny and detailed questioning.” (1) Failure of the board of directors to carefully examine billion-dollar acquisitions supported by management was another tear in the corporate culture. “Its culture was dominated by a strong chief executive officer, who was given virtually unfettered discretion to commit vast amounts of shareholder resources and determine corporate direction without even the slightest scrutiny or meaningful deliberation or analysis by senior management or the board of directors.” (1) The trail of accounting fraud had begun based on one man’s understanding of what mattered to Wall Street investors and
References: The Register. http://www.theregister.co.uk June 11, 2003. ElectricNews.net. Reports slam WorldCom corporate culture: Poster child for corporate governance failures. Wsws.org. http://www.wsws.org. July 16, 2005. World Socialist Web Site. The rise and fall of Bernie Ebbers. USA Today. http://www.usatodaycollege.com. June 27, 2002. Capitalizing on oldest trick in book: How WorldCom, and others, fudged results. Goliath Business News. http://goliath.ecnext.com. February 4, 2001. Behind closed doors at WorldCom: 2001. Helium Business Management. http://www.helium.com. September 23, 2003. The pros and cons of being a “whistle blower”. Find Law. http://fl1.findlaw.com/news.findlaw.com/hdocs/docs/worldcom/ bdspcomm60903rpt.pdf. March 31, 2003. Special Investigative Committee of the Board of Directors of WorldCom, Inc. IFAC Media Report. http://www.ifac.org/MediaCenter/?q=node/view/323. February 3, 2004. Leaders of International Accounting Profession Support Actions to Strengthen Profession and Corporate Governance