WorldCom’s scandal
Introduction
WorldCom’s scandal is one of the greatest and well-known fraud scandals to rock the wall street. WorldCom, one of the biggest telecommunication companies, attempted to increase the income on its profit and lost about $4 billion in 2001. The firm did this by controlling the monetary information, which influenced the accounting report and the balance sheet. The false bookkeeping was done through the maneuvers of the upper administration. Previously, the organization had reported that it would need to reexamine its ongoing budget summary of about $3.85 billion. For this reason, the investors, shareholders, and the public were left shocked and wondering as previous reports made turned out to be significant losses. Consequently, the accounting reports were brought to the limelight by doing an internal audit. Therefore, the main of this paper will be to discuss facts of the case, court ruling analysis, and the historical impact of the scandal.
Facts and causes
The economic success of WorldCom Company was characterized by an expansive growth that led to an increase in its performance. It was a supplier for the long-distance calls to most organizations and inhabitants. It started as a little organization at first known as the Long-Distance Discount Services (LDDS), which turned into the third-biggest organization in the US (Heracleous, and Katrin, 500). It included around 85,000 representatives and was set up in about 65 nations (Heracleous, and Katrin, 506). The CEO, Bernie Ebbers, helped the organization develop its venture to a 30-dollar billion income in under 10 years. (Heracleous, and Katrin, 500) He was among the wealthiest Americans with a total asset of about 1.4 billion dollars (Heracleous, and Katrin, 506). In any case, WorldCom was a victim of the desire that prompted the ascent of a money related scam intended to trick the general population until the monetary viewpoint improved. However, WorldCom stunned the business by securing MCI, the second huge long distance carrier, for around 47 billion dollars in 1998(Agnihotri, et al 10). The leading causes of bankruptcy were lack of strategy, the company’s culture, and corporate governance.
The leading cause of bankruptcy was due to the lack of corporation from the board members. The management had inadequate data about the organization and its acquisitions (Agnihotri, et al 10). The CEO, Ebbers, became wealthy by buying hotels, golf courses, and a large ranch in Canada. The board members did the multi-billion dollars transaction with little information. At times, they approved the deal with limited details, which lasted for less than an hour. The discussion did not involve board members, and there was no document presented when transactions were done. Ebbers, had a tremendous influence when approving and disapproving of the decisions made concerning the company. However, everything came to the limelight in 2000 when the stock of the company fell drastically during the dotcom outburst (Heracleous, and Katrin, 509).
The financial scandal was done by one of the unearthed employees, MS Cooper running a spot check on the company. Much credit went to Ms. Cooper, who brought the fraudulent activity to the limelight. As an internal auditor, she was requested by the new chief executive officer to check on the records weeks after taking over from Ebbers. Conversely, she discovered that the upper management team had been using unorthodox ways to make reports for the local companies to complete world distance calls. After analyzing the news, her information was revived by the senior management, and actions were taken against Ebbers. The U.S. financial market regulators, internal auditors, exchange commission also began the fraud inquiry. At the same time, the criminal investigation department also began to conduct their investigation was also discovered that Ebbers had been lent 400 million dollars to cover some loan he had against his shares of stock. A thorough examination by the criminal investigation team showed that Ebbers had been operating costs as capital expenses. The company was frustrated by his take, and Ebbers was fired as the CEO in 2002(Agnihotri, et al 10). Unfortunately, the WorldCom was then declared bankrupt and later acquired by Verizon for about 8.5 billion dollars (Heracleous, and Katrin, 500).
The company had a culture of fundraising in a gala as a routine for the company of its $3m per year(Kumar,232). Before the company had been involved in the scandal, it had handed over about 100,000 dollars for a fundraising gala, attended by Bush (Kumar,231). However, there is no valid evidence illustrating that payment was made to hide the misdoings of the company into the limelight. Unlike Enron, the company did not seem to have a connection with the white house. Similarly, there is no enough proof that the company’s executives attempted to contact the administration officials, as in the case of the Enron company (Kumar,232). The Enron CEO is known to have reached the administration official about the accounting scam before it came to the limelight unlike in WorldCom. In addition, the company had contributed about $1million to the university of Mississippi towards helping them build another institution (Kumar,232). It was done after the senator of Mississippi appointed an advisory company about the issue of taxing the sales made through the internet. The main aim of the company was to attract politicians of Mississippi through the contributions made. Therefore, the company’s culture had a vast influence to its bankruptcy.
Much credit went to Ms. Cooper, who brought the fraudulent activity to the limelight. As an internal auditor, she was requested by the new chief executive officer to check on the records weeks after taking over from Ebbers. Conversely, she discovered that the upper management team had been using unorthodox ways to make reports for the local companies to complete world distance calls. After analyzing the news, her information was revived by the senior management, and actions were taken against Ebbers.
Court rulings
On May 19, 2003, the federal security and exchange commission documented a statement in its legal action against the organization (Blythe,6). The case was done in a government court in the southern region of New York. The insolvency body of evidence held against the WorldCom organization expected them to pay a civil penalty of about $1,510,000,000(Blythe,1). Consequently, the district court decision on the settlement and issued an order which required both parties to provide information about specific issues.
Furthermore, the court order invited any other parties with interest in the case to file written documents with the clerk at the court before 5 p.m. on June 6, 2003(Blythe,7). The lawsuit also declared that t would not approve any settlement or accept any oral presentations from nonparties. The commission argued that the WorldCom misled investors through overstating their income since 1999 to its undisclosed closer and misleading accounting (Blythe,16). On November 26, 2002, the court ordered the company to do an extensive review of its corporate governors and internal control of the workers (Blythe,15). The main of the internal control was to train and educate the workers to reduce the possibility of future violations of the security laws. A Litigation Release No. 17866 to determine the monetary penalties that were imposed on the world come on November 26, 2002(Blythe,15).
Moreover, the commission filed a legal against four former employees of the company namely Betty L. Vinson, Troy M. Normand Buford Yates and David F. Myers (Blythe,17). A ruling was made, and four employees were forbidden from working as directors or officers of any governmental firm. They were also suspended from any job that is related to accounting. To settle the case, the commission enacted the remedial action, which would be undertaken by WorldCom. However, the supreme court rejected an appeal that made my Ebbers convicted of bookkeeping misrepresentation, which prompted the biggest U.S. liquidation. The government court found Ebbers in 2005 guilty of intrigue, fraud, and other violations identified with company’s bankruptcy (Blythe,1). For this reason, he was given 25 years in prison (Blythe,17). However, Ebbers’s attorney argues that the judge should have required the court to provide a defense to several witnesses of the case. He also claimed that the trial judge falsely instructed the judge to convict him in the roots that he engaged in conscious avoidance of the fraud.
Consequently, the appeal was rejected, and he was sentenced to prison until recently when he passed away after falling ill. I think that the court made the right decision to convicting the offenders since they had led the company bankrupt and made millions lose their money. The case also makes one wonder whether there were laws made before 2004 since the fraud cases had taken place for a long time. I think that such cases should be taken legal actions, and offenders should be jailed for their misdoings.
Impacts on society
First and foremost, WorldCom’s bankruptcy had an enormous impact on the social cost of the U.S. bankruptcy system. The Telecom companies which had played by the accounting rules are at a disadvantage as compared to the company. Unlike WorldCom, the firms had to service their lease obligations and also pay their debt (Nasser,8). Moreover, neither were their taxes reduced nor did their assets of the company increase. Instead, they were left at a dilemma and made more losses. There is also a negative perception of the corporate companies in the country has been reinforced. People are scared to invest in such companies as they are afraid that a scandal might pop up at any time. The WorldCom organization reinforces the lessons learned from the Enron firm and Arthur Andersen; which gives a negative view of the U.S. corporate world.
Secondly, the scandal made the government re-regulate the economy. The economy was a bit unstable since the firm was the third largest telecommunication company in the U.S(Lyke, and Mark,9 ). The Republican administration tries to tighten controls over corporate accounting and governance to avoid future mistakes. It also added rules and regulations for the companies which are more costly in terms of time and resources. For instance, it has become difficult to start a corporates company in the U.S., as there are more rules and regulations. In consequence, the scandal significantly led to a stringent U.S. telecom policy. This is because the security exchange commission declared the scandal as one of the worst scandals in history. Therefore, it made telecommunication policy with harshness and strictness. For this reason, the commission allowed selling the company to a rival to remove WorldCom as an ongoing crisis.
The third is that the losses made had a considerable impact on the workers and customers. The customers left in large numbers and sought for a relatively sophisticated network(Lyke, and Mark,9 ). However, it was hard for them to find a reliable one since they had been used to using WorldCom. Customers who had shares in the company were at a disadvantage since the company had become a difficulty. On the other hand, workers were left with no job, and they were not paid their salaries since the firm became broke. The four accounting officers were taken to court and were suspended from working from any of the public companies. Losing a job is often a hard task and can lead to depression and other mental illness disorders.
Conclusion
Conclusively, the causes of the bankruptcy served as a red flag that stakeholders and internal auditors should always consider. If there are any situations regarding a specific company, it is recommended that suspicions should be raised. For this reason, external audits should increase the quantity of persuasion that they have towards a suspicious company (Lyke, and Mark,9 ). If fraud has taken place in a company, the auditor should gather as much information to bring the suspect into the book. The scandal is an excellent example that people hate bad leadership and would do anything to remove corrupt leaders from the position. Therefore, people are encouraged to hold what is rightly their and stop bribery. The scandal also made other companies reshape into tightening the accounting and governance standards to achieve their profits. For this reason, most of the companies in the United States are not corrupts and always stretch their governance for better transparency and disclosure. It is for this reason that the U.S. remains the safest place that one could invest.
Works cited
Agnihotri, Anurag, et al. “Emerging Issues and Changing Face of Accounting.” Tecnia Journal of Management Studies (2018): 10.
Blythe, Stephen Errol. “Financial Statement Fraud: Lessons Learned from Selected US Legal Cases in the past Twenty Years.” Journal of Modern Accounting and Auditing 16.1 (2020): 1-18.
Heracleous, Loizos, and Katrin Werres. “On the road to disaster: Strategic misalignments and corporate failure.” Long Range Planning 49.4 (2016): 491-506.
Kumar, B. Rajesh. “WorldCom’s Acquisition of MCI.” Wealth Creation in the World’s Largest Mergers and Acquisitions. Springer, Cham, 2019. 229-233.
Lyke, Bob, and Mark Jickling. “WorldCom: The accounting scandal.” Congressional Research Service Report for Congress, August. Vol. 29. No 6. 2002. 3-89
Nasser, Tareque. “Insider trading and large Chapter 11 bankruptcies in USA.” International Journal of Banking and Finance 5.2 (2020): 1-29.
