Worldcom Scandal
This paper will explain the fraudulent accounting practices that led to the collapse of Worldcom. Other objectives of this paper will be to demonstrate how these activities were able to go undetected. Also, what motives drove the individuals involved to commit these acts. And finally the ethical accounting issues involved. Worldcom got its start as a small discount long distance provider in Mississippi. Founded by Bernard Ebbers and a number of others the idea for Worldcom was simple, buy long distance services from larger companies and then sell them off to small local ones. The idea worked and before long LDDS or Long Distance Discount Services, later to be called Worldcom was off and running. The company began acquiring small telecommunications
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firms and grew larger and larger. By 1995, Worldcom was one of the largest long distance providers in the world. As time progressed they acquired more then sixty companies, including MCI. The MCI take-over in 1997 cost over thirty seven billion, at the time it was considered the largest merger in American history. After the MCI deal Worldcom became the second largest Telecommunications Company in the United States. They owned one third of the data cables and were handling over fifty percent of all internet traffic in the United States. The growth of Worldcom was amazing, and they were the talk of Wall Street. In fact, by the late 1990's they were the fifth most widely held stock in America. A pretty big feat for a company founded out of a small Mississippi town. Worldcom rode the big wave of the telecommunications and internet boom of the mid to late 1990's. Its shares were worth about $115 billion, more then double that of telecommunications giant AT&T. However, by the end of 1999 a huge slow down was occurring in the internet and telecommunications industries. This is when the trouble began for Worldcom, as well as other telecommunications companies like Global Crossings. Wall Street reacted to this sudden dip in these industries, and stock prices began to fall. In order to keep the faith of investors and to keep earnings from falling drastically, this is when some of the telecommunication companies began to commit fraudulent financial reporting, Worldcom being the most notorious, of these accounting frauds. It was around this time, late 1999 when executives at Worldcom began to get involved in practices that were violations to generally accepted accounting principles and highly unethical. The accounting fraud at Worldcom was perpetrated by a number of high ranking executives, many of whom were in charge of accounting. At the forefront of the fraud was chief executive officer and founder Bernard Ebbers, in addition to allegedly instructing others to make the financial situation look better then it was, he also borrowed almost $400 million from the company to pay the margin call on his stock. Another key figure was Scott Sullivan, the company's chief financial officer, who spear headed the accounting manipulations. Sullivan also instructed key accounting staff, including the controller to follow along with his procedures. By June of 2002, Worldcom could no longer cover up the massive manipulations to their financial reports, their unethical and improper accounting practices had left the world's second largest telecommunication company in ruins. The trading of Worldcom stock stopped trading in late June at an all time low. The news from the Worldcom scandal was so far reaching it set new post September 11th lows for the stock market. By July of the same year the company claimed for bankruptcy protection of more then $41 billion in debt. By the end of the whole scandal investigations uncovered in total an estimated $11 billion in fraud over five consecutive quarters, the fraud remains the largest in United States history, even bigger then Enron.1 The following is intended to highlight the actual accounting manipulations that took place at Worldcom, and the affects they had on the financial statements of the firm.
The first offense was the disguising of $3.85 billion in expensing, which was done over a period of time. During the first quarter of 2001 $771 million of expenses were hidden, followed by $610 million in the second quarter; $743 million in the third quarter; $931 million in the forth quarter; and $797 million in the first quarter of 2002.2 As opposed to some of the accounting frauds committed in recent years that used ingenious techniques or creative accounting, Worldcom's expense cover-up was much more uncomplicated. Under the direction of Scott Sullivan operating costs were put on the books as capital expenses. This meant that operating expenses, primarily network maintenance costs and line-costs were placed on the books as capital investments, which basically made them assets. Line costs were payments to other telecommunication companies for the privilege to use their lines.2 The problem with treating operating costs as capital expenses is that the costs are only being pushed into the future. Therefore, they would have to hope for more and more revenue in coming years, even though their earnings were decreasing in recent years. Putting the expenses into the capital account meant they would not be due right away, such as normal operating expenses would be. Instead spreading the expenses over time, allowed for current expenses to appear to be lower then they really were. Worldcom was able to artificially lower current expenses which falsely showed higher earnings. This treatment of expenses has an affect on both the income statement and the balance sheet. On the balance sheet it helped increase retained earnings by treating the expenses as capital investments. On the income statement it decreases expenses, hence increasing net income.3 The second major accounting manipulation committed at Worldcom was the false inflation of revenue by using reserve accounts. They had taken money set aside and considered reserves, and simple added it into their profits. It was not very accurate, for them to show all the extra profit. The reserves original purpose is to set aside reserves that could be used to pay for such things as uncollected payments from customers, and or judgments to be owed in lawsuits. The fact that Worldcom had a reserve account was not at all illegal or even unethical. Many companies use reserve accounts to keep a small amount on the side in case a need presents itself. The case of Worldcom is a bit different; they are accused of pumping excessive money into the reserve accounts, with the intent to use the high amount of reserves as cushion to meet future earnings goals. This means that when they had some extra money they lied and said it would be used for upcoming liabilities that turn out to be uncollectible. However, they're intent all along was to inflate these reserves, so that in the event they were experiencing difficulties meeting earnings projections they could simple reach into the reserve account and make all their investors happy. Over the period of time of the accounting fraud, Worldcom moved over $3.3 billion of reserves that were supposed to be used to cover liabilities and simply added it to the revenue line. This increased revenue artificially gave investors the idea that Worldcom was generating gains when they realistically were not. All of the mistreatment and accounting manipulation caused Worldcom, to appear it was turning up good profits. In reality they were turning up loses. In fact, in 2001 they reported net income of $1.38 billion, when they actually had negative net income.3 Besides the question of why a company would intentionally mislead and lie to investors, the major question is how a firm could go five quarters of falsifying financial statements to the effect they did and not get caught. There are many differing opinions as to how they got away with these practices. Some believe it was the corporate culture at the firm, others feel that the accounting manipulations were so simple that auditors would never think a company would commit fraud so blatantly, also the lack of good internal control functions could have played an important role. The corporate culture of an organization is important for any corporation because it reflects the values and beliefs of the organization. I feel that it is the leaders of a company that help start a corporate culture. It is the founders and leaders at a company whose believes and objectives are used by the company. Therefore, if a handful of top executives in a firm are unethical or believe it is ok to lie to the public and investors in order to make the company appear good, this attitude may work its way into the company. In support of this some believe that the top executives at Worldcom held a large majority of power. In addition there was a focus on teamwork at the company, but not in the good way, where individuals share ideas and experiences in order to make smart decisions. The teamwork alleged at Worldcom was more along the lines of follow what your told and be a team player. These theories can not be proved, however it is reasonable to say that the group conspiring together was a major factor in why the fraud was allowed to go on for such a long period of time. One other belief stems from how simple the manipulations actually were. When the telecommunications industry began its slump, many felt Worldcom would take a turn for the worst. However, when they still managed to meet earnings, there was nothing going on that would make people expect fraud. Frank Partnoy makes a good argument in that, "Unlike other companies, there where no special purpose entities or off balance sheet derivatives for the company to use to hide losses or inflate profits. Worldcom's top managers weren't sophisticated enough to use Enron's elaborate schemes or even Global Crossing's IRU swaps."2 The wrongful accounting practices going on where almost so ridiculously simple and dumb that many would find it hard to believe that billions were being lied about. In reality who would think that a chief financial officer or anyone for that matter at the second largest telecommunications company in the world would take almost $4 billion of expenses and book them as assets. No matter how corrupt or desperate, one would assume that someone could come up with a more sophisticated plan. Another issue of key importance in this case is the lack of effective internal controls. Internal controls are key for any organization in that they help prevent abuses of the system, and help with making operations run more smoothly. At Worldcom there was an obvious lack of effective internal controls. This lack allowed for many things to be done by top managers without much checking. The absence of proper checks and balances and segregation of duties made it easier for decisions to be made with only a few people being aware. The internal control system at Worldcom undoubtedly played a role in allowing for the accounting manipulations to continue for a long period of time. However, in is important to note that because of the fraud at Worldcom and other recent corporate scandals, the Sarbanes Oxley Act was passed it includes section 404, which makes it a requirement for external auditors to give a separate opinion on internal controls before the normal audit can precede. After the Worldcom collapse, one might wonder why people would intentionally do something that should have been clearly known had a fairly good chance of coming back to them.
Although it is not my intention to get involved in the legal aspects involved with this matter it is of mild importance to mention that both the CEO and CFO along with a handful of other employees were found guilty of numerous charges and face huge fines and jail time. Knowing that and knowing that they might get into serious trouble for their actions, why would they commit fraud? Obvious motives include greed and or pressure to please investors and creditors. It is hard to know for sure but the above mentioned most likely played a role. However, it is important to look into the background of these people to see if their decisions were persuaded in part by lack of knowledge or experience. In the case of CFO Scott Sullivan, he went to school for business, and was knowledgeable in accounting. However, lacked experience expected from an important executive. But still had to understand he was making some pretty risky decisions. On the other hand, Bernard Ebbers grew up caring more about basketball and went to pretty much the only college that would let him play. He attended Mississippi College, and graduated with a degree in physical education. After college he coached high school basketball for a while and eventually invested with a few friends into a motel, he grew this business and eventually had a few motels. He started Worldcom in 1983; its success was due to good timing, help from Wall Street big wigs interested in the telecommunications industry, and Ebbers ability to be a great salesman. This is important because Ebbers never had a true business background, was not educated or well versed in finance or accounting. He was not the typical corporate executive, but he was all of a sudden running the second largest telecommunications firm in the world. He also had no background
in telecommunications except for a short term job at a Canadian telephone company.2 It is most probable that Ebbers was fully aware he was making decisions that were wrong; however it is possible that he was unaware of the extent of the consequences that would result from his actions. Ebbers most likely was put under lots of self pressure to perform, and more so for Worldcom to perform. He apparently took much advice from Jack Grubman, the Wall Street brains behind the short lived success of both Worldcom and Global Crossings. It can be assumed that the decisions to acquire so many companies and take on such heavy debt was due to advice from Grubman, who made millions because his bank helped with the financing.2 At the end of the internet and telecommunications boom, Worldcom was in serious trouble partly because of the large debt from the MCI merger. Ebbers and Worldcom were on the brink of losing a lot, so he tried to fix things. He allowed the CFO to try to make the company appear to be in better shape then it was which is wrong and very unethical. However, the point of this was to explain that whether or not he was aware how unethical his actions were, he was not equipped to deal with a situation where technical business knowledge, accounting policy, and an understanding of business ethics where required. The final issue and the most important are the ethical issues involved with Worldcom committing accounting fraud. The scale that the fraud was committed was the largest in American history, and certainly had many consequences for many parties. First it is important to point out the stakeholders, the ones who were affected by the unethical decisions carried out by Worldcom. The stakeholders stretch far and wide and include the Worldcom investors, creditors, employees and their families, customers, the auditors, the stock market, other corporations especially in the telecommunications industry, and even the Worldcom executives responsible. Investors in Worldcom were large and small, some were employees with 401k(s) invested in Worldcom stock, but all were affected in some way by the unethical accounting practices committed by Worldcom. Some small investors may have lost a couple hundred or thousand dollars, while larger investors lost millions. At its peak Worldcom stock was selling at over $62 a share, thus that didn't get out in time were left with almost nothing.1 The creditors of Worldcom including Solomon brothers and J.P. Morgan did get some money back, but lost a decent amount of money, not to mention the lost interest income if Worldcom had been able to pay its debt back properly. They also lost out on future business with Worldcom. Employees and their families were hurt very badly from the scandal. By the end of June 2002, Worldcom had to lay off 17,000 employees.1 It is fair to assume that most of these employees were not millionaires, and their families suffered financially. Also, being the second largest telecommunications company and given the fact that the whole industry was not in great shape, these employees quite likely had to find a new line of work. By 2002 it was estimated that Worldcom had over 20 million customers.3 These customers, especially business customers were most likely concerned that there services would be compromised, causing them to have to find another carrier and possibly pay higher service fees. Local phone companies and internet providers who depended on Worldcom owned data lines were most likely scared and faced with decisions that would change the way they conducted their business. Auditors of Worldcom both internal and external were greatly affected. The internal auditors and even accounting staff that had no ties to the accounting fraud, lost creditability and more then likely found it very hard to get another position in accounting. The external auditors were Arthur Anderson, Worldcom hurt them a lot because they were the auditors of Enron and others involved in recent corporate frauds. Anderson's image was tarnished enough during the Enron scandal when they were made the scapegoats for corporate corruption. Worldcom's accounting fraud caused the new executives in charge of cleaning up the mess to fire Anderson. Although, Arthur Anderson eventually went out of business most famously because of Enron, I am sure their involvement with Worldcom aided in their demise. The day news broke of the Worldcom fraud, Wall Street took major blows. It is unfair that people who earn a living from the market and the everyday investor should have to suffer on account of a few people at one company who decided to make a bunch of stupid decisions. Another stakeholder was the other telecommunications firms in the market. Many of these firms were still recovering or declining because of the slow down in the industry. Worldcom's practices brought more scrutiny on these firms, and caused investors to loss even more faith in the industry. Finally, the executives who orchestrated the whole scam where hugely affected by their lack of accounting ethics. They all lost their jobs, their reputations, and lots of money. Now I am sure they still made off like bandits from selling shares before everything went under, however many will never work in corporate America again, and the some might spend the rest of their lives in prison. It is clear to see the impact of making unethical decisions when in a position to affect the lives of so many innocent individuals. In the case of Worldcom it came down to accounting ethics. The individuals responsible knowingly and willingly conspired to commit acts that violated accounting ethics from any point of view that you look at it. These people in all fairness did not want to get caught, and did not want to hurt so many people with their decisions. Maybe their idea of ethics in accounting and business in general is outside the norm or possibly entirely nonexistent. Either way anybody in a position, who's accounting ethics, could jeopardize the lives of so many should be able to appreciate the importance of ethical decision making. Recent years have plagued this country with scandal after scandal where millions have lost there jobs or money due to people following unethical ideals. Many blame greed and power as motivators for ignoring ethics. But if the recent frauds teach one thing it's that ethics is essential to a business. And more specifically ethics in accounting which is the backbone of all business is of the utmost importance. Time and time again unethical accounting practices have landed top executives is jail or serious trouble with the law, shouldn't people realize that even though ethical accounting may not yield the biggest payout it will in most cases keep the business in existence. It's not clear that everyone believes in the importance of ethics in accounting for the well being of a firm and for the economy as a whole. Hopefully, the recent events and recent regulations passed, including section 406 of the Sarbanes Oxley Act which mandates that all companies put a code of ethics in place for upper level management at publicly held companies, will sway non believers that ethics in accounting is one of the most important necessities in business.
firms and grew larger and larger. By 1995, Worldcom was one of the largest long distance providers in the world. As time progressed they acquired more then sixty companies, including MCI. The MCI take-over in 1997 cost over thirty seven billion, at the time it was considered the largest merger in American history. After the MCI deal Worldcom became the second largest Telecommunications Company in the United States. They owned one third of the data cables and were handling over fifty percent of all internet traffic in the United States. The growth of Worldcom was amazing, and they were the talk of Wall Street. In fact, by the late 1990's they were the fifth most widely held stock in America. A pretty big feat for a company founded out of a small Mississippi town. Worldcom rode the big wave of the telecommunications and internet boom of the mid to late 1990's. Its shares were worth about $115 billion, more then double that of telecommunications giant AT&T. However, by the end of 1999 a huge slow down was occurring in the internet and telecommunications industries. This is when the trouble began for Worldcom, as well as other telecommunications companies like Global Crossings. Wall Street reacted to this sudden dip in these industries, and stock prices began to fall. In order to keep the faith of investors and to keep earnings from falling drastically, this is when some of the telecommunication companies began to commit fraudulent financial reporting, Worldcom being the most notorious, of these accounting frauds. It was around this time, late 1999 when executives at Worldcom began to get involved in practices that were violations to generally accepted accounting principles and highly unethical. The accounting fraud at Worldcom was perpetrated by a number of high ranking executives, many of whom were in charge of accounting. At the forefront of the fraud was chief executive officer and founder Bernard Ebbers, in addition to allegedly instructing others to make the financial situation look better then it was, he also borrowed almost $400 million from the company to pay the margin call on his stock. Another key figure was Scott Sullivan, the company's chief financial officer, who spear headed the accounting manipulations. Sullivan also instructed key accounting staff, including the controller to follow along with his procedures. By June of 2002, Worldcom could no longer cover up the massive manipulations to their financial reports, their unethical and improper accounting practices had left the world's second largest telecommunication company in ruins. The trading of Worldcom stock stopped trading in late June at an all time low. The news from the Worldcom scandal was so far reaching it set new post September 11th lows for the stock market. By July of the same year the company claimed for bankruptcy protection of more then $41 billion in debt. By the end of the whole scandal investigations uncovered in total an estimated $11 billion in fraud over five consecutive quarters, the fraud remains the largest in United States history, even bigger then Enron.1 The following is intended to highlight the actual accounting manipulations that took place at Worldcom, and the affects they had on the financial statements of the firm.
The first offense was the disguising of $3.85 billion in expensing, which was done over a period of time. During the first quarter of 2001 $771 million of expenses were hidden, followed by $610 million in the second quarter; $743 million in the third quarter; $931 million in the forth quarter; and $797 million in the first quarter of 2002.2 As opposed to some of the accounting frauds committed in recent years that used ingenious techniques or creative accounting, Worldcom's expense cover-up was much more uncomplicated. Under the direction of Scott Sullivan operating costs were put on the books as capital expenses. This meant that operating expenses, primarily network maintenance costs and line-costs were placed on the books as capital investments, which basically made them assets. Line costs were payments to other telecommunication companies for the privilege to use their lines.2 The problem with treating operating costs as capital expenses is that the costs are only being pushed into the future. Therefore, they would have to hope for more and more revenue in coming years, even though their earnings were decreasing in recent years. Putting the expenses into the capital account meant they would not be due right away, such as normal operating expenses would be. Instead spreading the expenses over time, allowed for current expenses to appear to be lower then they really were. Worldcom was able to artificially lower current expenses which falsely showed higher earnings. This treatment of expenses has an affect on both the income statement and the balance sheet. On the balance sheet it helped increase retained earnings by treating the expenses as capital investments. On the income statement it decreases expenses, hence increasing net income.3 The second major accounting manipulation committed at Worldcom was the false inflation of revenue by using reserve accounts. They had taken money set aside and considered reserves, and simple added it into their profits. It was not very accurate, for them to show all the extra profit. The reserves original purpose is to set aside reserves that could be used to pay for such things as uncollected payments from customers, and or judgments to be owed in lawsuits. The fact that Worldcom had a reserve account was not at all illegal or even unethical. Many companies use reserve accounts to keep a small amount on the side in case a need presents itself. The case of Worldcom is a bit different; they are accused of pumping excessive money into the reserve accounts, with the intent to use the high amount of reserves as cushion to meet future earnings goals. This means that when they had some extra money they lied and said it would be used for upcoming liabilities that turn out to be uncollectible. However, they're intent all along was to inflate these reserves, so that in the event they were experiencing difficulties meeting earnings projections they could simple reach into the reserve account and make all their investors happy. Over the period of time of the accounting fraud, Worldcom moved over $3.3 billion of reserves that were supposed to be used to cover liabilities and simply added it to the revenue line. This increased revenue artificially gave investors the idea that Worldcom was generating gains when they realistically were not. All of the mistreatment and accounting manipulation caused Worldcom, to appear it was turning up good profits. In reality they were turning up loses. In fact, in 2001 they reported net income of $1.38 billion, when they actually had negative net income.3 Besides the question of why a company would intentionally mislead and lie to investors, the major question is how a firm could go five quarters of falsifying financial statements to the effect they did and not get caught. There are many differing opinions as to how they got away with these practices. Some believe it was the corporate culture at the firm, others feel that the accounting manipulations were so simple that auditors would never think a company would commit fraud so blatantly, also the lack of good internal control functions could have played an important role. The corporate culture of an organization is important for any corporation because it reflects the values and beliefs of the organization. I feel that it is the leaders of a company that help start a corporate culture. It is the founders and leaders at a company whose believes and objectives are used by the company. Therefore, if a handful of top executives in a firm are unethical or believe it is ok to lie to the public and investors in order to make the company appear good, this attitude may work its way into the company. In support of this some believe that the top executives at Worldcom held a large majority of power. In addition there was a focus on teamwork at the company, but not in the good way, where individuals share ideas and experiences in order to make smart decisions. The teamwork alleged at Worldcom was more along the lines of follow what your told and be a team player. These theories can not be proved, however it is reasonable to say that the group conspiring together was a major factor in why the fraud was allowed to go on for such a long period of time. One other belief stems from how simple the manipulations actually were. When the telecommunications industry began its slump, many felt Worldcom would take a turn for the worst. However, when they still managed to meet earnings, there was nothing going on that would make people expect fraud. Frank Partnoy makes a good argument in that, "Unlike other companies, there where no special purpose entities or off balance sheet derivatives for the company to use to hide losses or inflate profits. Worldcom's top managers weren't sophisticated enough to use Enron's elaborate schemes or even Global Crossing's IRU swaps."2 The wrongful accounting practices going on where almost so ridiculously simple and dumb that many would find it hard to believe that billions were being lied about. In reality who would think that a chief financial officer or anyone for that matter at the second largest telecommunications company in the world would take almost $4 billion of expenses and book them as assets. No matter how corrupt or desperate, one would assume that someone could come up with a more sophisticated plan. Another issue of key importance in this case is the lack of effective internal controls. Internal controls are key for any organization in that they help prevent abuses of the system, and help with making operations run more smoothly. At Worldcom there was an obvious lack of effective internal controls. This lack allowed for many things to be done by top managers without much checking. The absence of proper checks and balances and segregation of duties made it easier for decisions to be made with only a few people being aware. The internal control system at Worldcom undoubtedly played a role in allowing for the accounting manipulations to continue for a long period of time. However, in is important to note that because of the fraud at Worldcom and other recent corporate scandals, the Sarbanes Oxley Act was passed it includes section 404, which makes it a requirement for external auditors to give a separate opinion on internal controls before the normal audit can precede. After the Worldcom collapse, one might wonder why people would intentionally do something that should have been clearly known had a fairly good chance of coming back to them.
Although it is not my intention to get involved in the legal aspects involved with this matter it is of mild importance to mention that both the CEO and CFO along with a handful of other employees were found guilty of numerous charges and face huge fines and jail time. Knowing that and knowing that they might get into serious trouble for their actions, why would they commit fraud? Obvious motives include greed and or pressure to please investors and creditors. It is hard to know for sure but the above mentioned most likely played a role. However, it is important to look into the background of these people to see if their decisions were persuaded in part by lack of knowledge or experience. In the case of CFO Scott Sullivan, he went to school for business, and was knowledgeable in accounting. However, lacked experience expected from an important executive. But still had to understand he was making some pretty risky decisions. On the other hand, Bernard Ebbers grew up caring more about basketball and went to pretty much the only college that would let him play. He attended Mississippi College, and graduated with a degree in physical education. After college he coached high school basketball for a while and eventually invested with a few friends into a motel, he grew this business and eventually had a few motels. He started Worldcom in 1983; its success was due to good timing, help from Wall Street big wigs interested in the telecommunications industry, and Ebbers ability to be a great salesman. This is important because Ebbers never had a true business background, was not educated or well versed in finance or accounting. He was not the typical corporate executive, but he was all of a sudden running the second largest telecommunications firm in the world. He also had no background
in telecommunications except for a short term job at a Canadian telephone company.2 It is most probable that Ebbers was fully aware he was making decisions that were wrong; however it is possible that he was unaware of the extent of the consequences that would result from his actions. Ebbers most likely was put under lots of self pressure to perform, and more so for Worldcom to perform. He apparently took much advice from Jack Grubman, the Wall Street brains behind the short lived success of both Worldcom and Global Crossings. It can be assumed that the decisions to acquire so many companies and take on such heavy debt was due to advice from Grubman, who made millions because his bank helped with the financing.2 At the end of the internet and telecommunications boom, Worldcom was in serious trouble partly because of the large debt from the MCI merger. Ebbers and Worldcom were on the brink of losing a lot, so he tried to fix things. He allowed the CFO to try to make the company appear to be in better shape then it was which is wrong and very unethical. However, the point of this was to explain that whether or not he was aware how unethical his actions were, he was not equipped to deal with a situation where technical business knowledge, accounting policy, and an understanding of business ethics where required. The final issue and the most important are the ethical issues involved with Worldcom committing accounting fraud. The scale that the fraud was committed was the largest in American history, and certainly had many consequences for many parties. First it is important to point out the stakeholders, the ones who were affected by the unethical decisions carried out by Worldcom. The stakeholders stretch far and wide and include the Worldcom investors, creditors, employees and their families, customers, the auditors, the stock market, other corporations especially in the telecommunications industry, and even the Worldcom executives responsible. Investors in Worldcom were large and small, some were employees with 401k(s) invested in Worldcom stock, but all were affected in some way by the unethical accounting practices committed by Worldcom. Some small investors may have lost a couple hundred or thousand dollars, while larger investors lost millions. At its peak Worldcom stock was selling at over $62 a share, thus that didn't get out in time were left with almost nothing.1 The creditors of Worldcom including Solomon brothers and J.P. Morgan did get some money back, but lost a decent amount of money, not to mention the lost interest income if Worldcom had been able to pay its debt back properly. They also lost out on future business with Worldcom. Employees and their families were hurt very badly from the scandal. By the end of June 2002, Worldcom had to lay off 17,000 employees.1 It is fair to assume that most of these employees were not millionaires, and their families suffered financially. Also, being the second largest telecommunications company and given the fact that the whole industry was not in great shape, these employees quite likely had to find a new line of work. By 2002 it was estimated that Worldcom had over 20 million customers.3 These customers, especially business customers were most likely concerned that there services would be compromised, causing them to have to find another carrier and possibly pay higher service fees. Local phone companies and internet providers who depended on Worldcom owned data lines were most likely scared and faced with decisions that would change the way they conducted their business. Auditors of Worldcom both internal and external were greatly affected. The internal auditors and even accounting staff that had no ties to the accounting fraud, lost creditability and more then likely found it very hard to get another position in accounting. The external auditors were Arthur Anderson, Worldcom hurt them a lot because they were the auditors of Enron and others involved in recent corporate frauds. Anderson's image was tarnished enough during the Enron scandal when they were made the scapegoats for corporate corruption. Worldcom's accounting fraud caused the new executives in charge of cleaning up the mess to fire Anderson. Although, Arthur Anderson eventually went out of business most famously because of Enron, I am sure their involvement with Worldcom aided in their demise. The day news broke of the Worldcom fraud, Wall Street took major blows. It is unfair that people who earn a living from the market and the everyday investor should have to suffer on account of a few people at one company who decided to make a bunch of stupid decisions. Another stakeholder was the other telecommunications firms in the market. Many of these firms were still recovering or declining because of the slow down in the industry. Worldcom's practices brought more scrutiny on these firms, and caused investors to loss even more faith in the industry. Finally, the executives who orchestrated the whole scam where hugely affected by their lack of accounting ethics. They all lost their jobs, their reputations, and lots of money. Now I am sure they still made off like bandits from selling shares before everything went under, however many will never work in corporate America again, and the some might spend the rest of their lives in prison. It is clear to see the impact of making unethical decisions when in a position to affect the lives of so many innocent individuals. In the case of Worldcom it came down to accounting ethics. The individuals responsible knowingly and willingly conspired to commit acts that violated accounting ethics from any point of view that you look at it. These people in all fairness did not want to get caught, and did not want to hurt so many people with their decisions. Maybe their idea of ethics in accounting and business in general is outside the norm or possibly entirely nonexistent. Either way anybody in a position, who's accounting ethics, could jeopardize the lives of so many should be able to appreciate the importance of ethical decision making. Recent years have plagued this country with scandal after scandal where millions have lost there jobs or money due to people following unethical ideals. Many blame greed and power as motivators for ignoring ethics. But if the recent frauds teach one thing it's that ethics is essential to a business. And more specifically ethics in accounting which is the backbone of all business is of the utmost importance. Time and time again unethical accounting practices have landed top executives is jail or serious trouble with the law, shouldn't people realize that even though ethical accounting may not yield the biggest payout it will in most cases keep the business in existence. It's not clear that everyone believes in the importance of ethics in accounting for the well being of a firm and for the economy as a whole. Hopefully, the recent events and recent regulations passed, including section 406 of the Sarbanes Oxley Act which mandates that all companies put a code of ethics in place for upper level management at publicly held companies, will sway non believers that ethics in accounting is one of the most important necessities in business.