Worldcom
Q 1 Explain the nature of accounting fraud?
A1.
Background:
The origin of WorldCom can be traced to the breakup of AT&T in 1983. The company began as Long Distance Discount Services Inc during 1983. LDD name was changed to WorldCom in 1995.
To build the economies of scale that were critical success factor in long distance market it was imperative for WorldCom to grow its available volume off bandwidth as it lowered the per unit costs. Also the Telecommunication act of 1996 permitted long distance carriers to compete for local services transforming the industry’s competitive landscape. Companies went on a war footing note to provide their customers a single source of all telecommunication service
WorldCom therefore decided to grow largely by acquiring other telecommunication companies notably MFS Communication and MCI Communication by using its highly valued stock
Nature of Accounting Fraud
There were several issues and problems which led to one of the history’s biggest accounting fraud.
Beginning modestly and continuing at an accelerated pace the company under the direction of Ebbers (CEO) and Sullivan (CFO)) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom‟s stock.
Expense to Revenue (E/R) Ratio
The objective of WorldCom as stated by Ebbers in 1997 was not to capture market share or be global. The goal was to be number 1 stock in Wall Street. This led to an unhealthy practice of brining in revenue through any mean even if meant bending or breaking the rules. WorldCom objective was to maintain the E/R ratio of 42%. However the overheated competitive environment in 2000 and reduced demand for Telecommunication services triggered by economic recession and dot com bubble burst put a severe pressure on WorldCom most important performance indicator the E/R ratio. The company struggled to maintain the E/R ratio to 42% on subsequent quarters
A1.
Background:
The origin of WorldCom can be traced to the breakup of AT&T in 1983. The company began as Long Distance Discount Services Inc during 1983. LDD name was changed to WorldCom in 1995.
To build the economies of scale that were critical success factor in long distance market it was imperative for WorldCom to grow its available volume off bandwidth as it lowered the per unit costs. Also the Telecommunication act of 1996 permitted long distance carriers to compete for local services transforming the industry’s competitive landscape. Companies went on a war footing note to provide their customers a single source of all telecommunication service
WorldCom therefore decided to grow largely by acquiring other telecommunication companies notably MFS Communication and MCI Communication by using its highly valued stock
Nature of Accounting Fraud
There were several issues and problems which led to one of the history’s biggest accounting fraud.
Beginning modestly and continuing at an accelerated pace the company under the direction of Ebbers (CEO) and Sullivan (CFO)) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom‟s stock.
Expense to Revenue (E/R) Ratio
The objective of WorldCom as stated by Ebbers in 1997 was not to capture market share or be global. The goal was to be number 1 stock in Wall Street. This led to an unhealthy practice of brining in revenue through any mean even if meant bending or breaking the rules. WorldCom objective was to maintain the E/R ratio of 42%. However the overheated competitive environment in 2000 and reduced demand for Telecommunication services triggered by economic recession and dot com bubble burst put a severe pressure on WorldCom most important performance indicator the E/R ratio. The company struggled to maintain the E/R ratio to 42% on subsequent quarters