WorldCom’s Bankruptcy Crisis
Introduction
Murray
Waldron and William Rector, two Hattiesburg businessmen, founded this company
in 1983. Bernard Ebbers was the company’s first CEO. For the next 15 years, it
expanded rapidly. Long Distance Discount Service (LDDS) was the company’s
original branding, which was later changed to WorldCom. It is well-known for
delivering telecommunication services to its customers all over the world. It
was now America’s second-largest contact firm. Instead of becoming the world’s
biggest telecommunications services company, it became the country’s largest
bankrupt filler. And the second-largest accounting blunder of the twenty-first
century.
Prior to Bankruptcy, Financial
Performance
The
company gained momentum in the 1990s as a result of a flood of mergers and
acquisitions. ATC (Advanced Telecommunications Corporation) paid $ 720 million
for WorldCom in 1992, beating main rivals Sprint Corporation and AT&T to
become a major player in telecommunications. IDB Communications Group, Inc. was
discovered in 1994, Williams Technology Group, Inc. was discovered in 1995, MFS
Communications Company was discovered in 1996, and MCI was discovered in 1998.
Metromedia Communication Corp. and Resurges Communications Group were
discovered in 1993, IDB Communications Group, Inc. was discovered in 1994,
Williams Technology Group, Inc. was discovered in 1995, MFS Communications
Company was discovered in 1996, and MCI was discovered in 1998. MFS acquired
UUNET Technologies shortly before merging with WorldCom.
WorldCom
and MCI Communications announced a $ 37 billion joint venture to develop MCI
WorldCom on November 4, 1997, the largest joint venture in US history. The
merger was completed on September 15, 1998, resulting in the creation of MCI
WorldCom. To gain approval from the US Department of Justice, MCI downgraded
its “internet” sector.
Sprint
Company and MCI WorldCom declared a $ 129 billion cooperative venture on Oct.
5, 1999. If the deal had been completed, it would have resulted in the merging
of the world’s two biggest corporations. The combined firm will be the biggest
telecommunications company in the United States, surpassing AT&T. The deal,
however, fell through due to objections from the US Department of Justice and
the European Union over concerns that it would establish a monarchy. Both
companies’ boards of directors dissolved their joint venture on July 13, 2000.
MCI WorldCom changed its name to “WorldCom” later that year.
Suffocate
Unfortunately
for thousands of workers and shareholders, WorldCom has wrongly reported $ 3.8
billion in financial spending, which has boosted the rate of cash flows and
earnings in all four quarters of 2001 and the first quarter of 2002. Since
spending can be long-term deductions, and expenditures can be excluded from
sales automatically, the company’s real residual deficit in five rooms is
hidden. WorldCom also redistributes prices by lowering the value of goods from
discovered firms while raising the value of interest. Acquired firms take on
accounts that have been ignored or slightly forgotten by the organization.
WorldCom’s financial position seems to be changing quarterly as a result of
these accounting activities. As long as WorldCom continues to purchase new
companies, accountants can change commodity prices and prices. Internal
auditing revealed questionable accounting practises that date back to 1999.
Investors, unaware of the alleged fraud, proceeded to buy the company’s stock,
raising the price to $ 64 per share. When unethical accounting practises were
exposed, WorldCom was also in financial difficulties. Owing to a reduction in
inflation and earnings, as well as a desire for revenue, the company was
heavily in debt. The firm has taken advantage of the rising value of its stock
to fund the purchase of other companies. The discovery of these companies,
especially Miscommunications, drew investors to WorldCom stocks. WorldCom CEO
Bernard Ebbers has also received a $ 408 million loan from the board of
directors to fund low-level calls on loans secured by the company’s portfolio.
The Board has borrowed Ebbers money at a rate that is lower than the national
average and lower than their expected return. WorldCom reached a lending deal
with several banks in July 2001, agreeing to lend $ 2.65 billion and repay it
within a year. WorldCom allegedly influenced the entire volume six weeks prior
to the announcement of financial irregularities, according to banks. Banks say
that if they understood the true state of WorldCom’s finances, they would not
raise the loan amount without finding additional collateral.
The
Securities and Exchange Commission (SEC) directed WorldCom to report
information that led to the circumstances outlined in the June 25 press release
about the company’s intention to replicate its 2001 financial statements and
the first quarter of 2002. a record that has been led He clarified that CFO
Scott Sullivan had prepared the 2001 and first quarter of 2002 financial
statements. On February 6, 2002, the WorldCom Audit Committee and Arthur
Andersen, the company’s external auditor, met to review the review for the year
stemmedDec. 31, 2001.
Arthur
Andersen examined WorldCom’s accounting practices to see whether they could be
included. Adequate safeguards against financial statements material
misrepresentation WorldCom’s processes for additional line charges,
capitalization of building property, and computer accounts were successful,
according to Andersen. In response to particular committee questions, Andersen
claimed that their auditors had never had a disagreement with management, and
that this is also true for WorldCom’s accounting functions. WorldCom agreed to
break the General Accounting System (GAAP), which was revamped, between 1999
and 2002, and their salaries totaled $ 11 billion. Accounting fraud is
estimated to be worth $1.5 billion, according to experts.
Common Size Bank Statements
WorldCom
|
|
1999 |
2000 |
2001 |
|
Revenue |
100% |
100% |
100% |
|
Line cost |
41 |
39.6 |
41.9 |
|
Trade General Secretarial |
24.9 |
27.1 |
31.4 |
|
Reductionand payback |
12.1 |
12.5 |
16.7 |
|
Workingsalary |
22 |
20.9 |
10 |
|
Interestcost |
2.7 |
2.5 |
4.4 |
|
Sundry |
0.7 |
1 |
1.2 |
|
Revenue before income taxes, |
20.3 |
19.4 |
6.8 |
|
Requirement for paylevies |
8.3 |
7.7 |
2.6 |
|
Revenue before smallerinterests and collective |
11.7 |
11.7 |
4.2 |
|
Factionbenefits |
0.5 |
0.8 |
0.1 |
|
Collective effect of shift |
— |
0.2 |
— |
|
Net pay |
11.2 |
10.6 |
4.3 |
|
Delivery on compulsorily redeemable chose |
0.2 |
0.2 |
0.3 |
|
Net revenue applicable to mutualstock |
11% |
10.5% |
3.9% |
WorldCom
Statements in 10-K
In 2001, line costs as a percentage of sales rose to
41.9 percent, up from 39.6% in 2000. Line expenditures for the year 2000,
except Embratel, totaled $ 13.8 billion, or 38.9% of revenues. The rise in
sales is due to price demand for commercial data and aggressive prices as a
dial-up Internet company, which resulted in a 17 percent decrease in access
revenue per hour in 2001 compared to 2000. As previously said, sales rose due
to reduced revenue from calling cards and higher margin telephone calls as a
result of the wireless exchange.
Balance Sheets – Assets
|
|
Dec 31,2000 |
Dec 31,2001 |
|
|
$761 |
$1416 |
|
|
6815 |
5308 |
|
|
172 |
251 |
|
|
2007 |
2230 |
|
|
9755 |
9205 |
|
|
20288 |
23814 |
|
|
8100 |
7878 |
|
|
9342 |
11263 |
|
|
6897 |
5706 |
|
|
44627 |
48661 |
|
(7204) |
(9852) |
|
|
37423 |
38809 |
|
|
|
46594 |
50537 |
|
|
5131 |
5363 |
|
|
$ 98,903 |
$ 103,914 |
|
|
Dec 31,2000 |
Dec 31,2001 |
|
|
$761 |
$1416 |
|
|
6815 |
5308 |
|
|
172 |
251 |
|
|
2007 |
2230 |
|
|
9755 |
9205 |
|
|
20288 |
23814 |
|
|
8100 |
7878 |
|
|
9342 |
11263 |
|
|
6897 |
5706 |
|
|
44627 |
48661 |
|
(7204) |
(9852) |
|
|
37423 |
38809 |
|
|
|
46594 |
50537 |
|
|
5131 |
5363 |
|
|
$ 98,903 |
$ 103,914 |
Balance Sheets– Liabilities
|
YEAR. |
SALES |
NET |
CFO |
RESOURCES |
LIABILITIES |
|
1997 |
7351 |
384 |
1318 |
22390 |
8880 |
|
1998 |
17678 |
-2687 |
4085 |
86401 |
37674 |
|
1999 |
37120 |
3950 |
11005 |
91072 |
37187 |
|
2000 |
39090 |
4089 |
7666 |
98903 |
40902 |
|
2001 |
35179 |
1384 |
7778 |
103914 |
43890 |
Financial Ratio of WorldCom: financial
statements 2000 & 2001
A forensic accountant can
detect the relationship between an entity’s income statement and balance sheet
by comparing the two financial statements. On the balance sheet, for example,
if a transaction is reported on the income statement, assets will rise and
liabilities will fall. Expenses have an effect on both the income statement and
the balance sheet. When a cost is reported on the income statement, for
example, assets will decrease and liabilities will increase on the balance
sheet.
Finally, it’s clear that an
income statement audit admission would have an effect on the balance sheet for
the accounting period. According to WorldCom’s financial statements, the
company’s earnings decreased between the fiscal years 2000 and 2001, while
liquidity increased. In addition, it seems that the return on investment has
dropped dramatically.
Overall, the company’s
financial performance has deteriorated as a result of lower sales and higher
costs, which is cause for concern. The spike in land, factory, and
infrastructure prices, for example, leads to the conclusion that WorldCom may
have under-reported expenditures elsewhere in the income statement. The
corporation had to raise another account on the balance sheet to compensate for
the under-reporting of these costs on the income statement.
|
WorldCom,Inc. |
||
|
Balance-Sheet |
||
|
As on December 31 |
||
|
Figures in millions |
||
|
ASSETS |
2000 |
2001 |
|
“Current |
||
|
“Cash |
$761 |
$1,416 |
|
“Accounts |
6,815 |
5,308 |
|
“Deferred |
172 |
251 |
|
“Other |
2,007 |
2,230 |
|
“Total current |
9,755 |
9,205 |
|
“Property, |
37,423 |
38,809 |
|
“Goodwill |
46,594 |
50,537 |
|
Other |
5,131 |
5,363 |
|
$98,903 |
$103,914 |
|
|
LIABILITIES |
||
|
Current liabilities: |
||
|
Short-term debt and currentmaturities of long-term debt |
$7,200 |
$172 |
|
Accrued interest |
446 |
618 |
|
Accounts payable and accruedline costs |
6,022 |
4,844 |
|
Other current liabilities |
4,005 |
3,576 |
|
Total current liabilities |
17,673 |
9,210 |
|
Long-term |
||
|
“Long-term |
17,696 |
30,038 |
|
“Deferred |
3,611 |
4,066 |
|
“Other |
1,124 |
576 |
|
“Total |
22,431 |
34,680 |
|
“Minority |
2,592 |
101 |
|
“Company |
798 |
1,993 |
|
Shareholders’ |
||
|
“WorldCom, |
29 |
0 |
|
“WorldCom |
0 |
30 |
|
“MCI group common |
0 |
1 |
|
“Additional |
52,877 |
54,297 |
|
“Retained |
3,160 |
4,400 |
|
“Unrealized |
345 |
-51 |
|
“Cumulative |
-817 |
-562 |
|
“Treasury |
-185 |
-185 |
|
Total |
55,409 |
57,930 |
Reasons behind Debacle
While
the company’s biggest telephone company, WorldCom, collapsed and was absorbed,
the U.S. He saw one of history’s most egregious accounting frauds. On July 13,
2005, former CEO Bernie Ebbers, 63, was found guilty of conspiracy to defraud
the US $ 11 billion accountant and sentenced to 25 years in prison. What
happened to the audits and ratings? They aren’t paying attention? What happened
to WorldCom’s board of directors, the company’s once-powerful executives, in
particular? Are they “drowning in the swamp”?
I
came across an informative article titled “Report of Investigation”
dated March 31, 2003 while investigating these big flaws in corporate
governance and what could be done to stop them. The Report is the source of the
majority of my analysis, and all of the quotes below may be explicitly linked
to it. WorldCom publishes major financial statements that hide the company’s
deteriorating financial situation. The following is how the financial
shenanigans were listed in the report: “… While fraud was widespread, it
was carried out in an unusual manner: fraudulent or unsupported financial
statements totaling more than $ 9 billion were sent to WorldCom’s financial
systems in order to receive the recorded financial results. Bernie Ebbers, the
CEO of WorldCom, was the driving force behind the scam. Ebbers were
specifically focused on generating incredible acquisition success in the 1990s.
How will he cover the cost of his adoption inebriation, using WorldCom stock as
an example. The stock had to continue to rise in value in order to reach this
purchase price. Here’s a quick rundown of the situation as described in the
Report:
WorldCom
has been keeping a close eye on a growing range of acquisitions. The plan
culminated in the 1998 purchase of WorldCom by MCI Communications, a corporation
with more than twice as much turnover as WorldCom. Due to claims of dishonesty,
the planned merger with Sprint has been cancelled… “
Ebbers
recognize the importance of showing sales and revenue. Financial strains were
the only way to achieve this goal. The dilemma is that working with this method
of cheating makes it much more difficult to implement. Fraud does not remain
constant over time. The downturn in the telecommunications industry has made
Ebbers’ situation worse. “Wall Street has
predicted a double-digit growth rate for WorldCom at this point”. After
all, they’ve accomplished so much in such a short time. On the other hand,
WorldCom needed time for its executives to maintain their newly acquired
companies, understand how to use them, and act responsibly. Ebbers lacked the
courage to inform Wall Street that WorldCom needed more time to consolidate and
digest its acquisitions. To satisfy Wall Street’s needs, Ebbers had to consult
his company’s medical records. If he had the courage to tell them what they
truly wanted, WorldCom would still be alive today, and Ebbers would not have
lived the remainder of his life in prison. Eber’s apparent need to expand and
retain his financial status was also a major part of the con. As a result, he
had to demonstrate a consistent rise in money in order to avoid low-level calls
in his WorldCom warehouse, which he had agreed in exchange for a loan.
In
1983, he was one of the company’s founders. He became the company’s chief
operating officer in 1985. He held the position until April 2002, when he
resigned. There was his financial dilemma, which may have influenced the
accounting of the accounting case under his supervision. When he retired, he
owed over $400 million on a debt secured by his WorldCom shares. (US
Telecommunications Company) WorldCom claims to be hiding $ 3.8 billion in
costs; US History’s Largest Writings
Scott
Sullivan was WorldCom’s interim chief financial officer and secretary. In June
2002, he was also sacked for blatantly listing the incorrect accounting.
Bernard Ebbers considered him a close associate. (Telecommunications Company of
the United States of America) WorldCom claims to have discovered $ 3.8 billion
in hidden funds, making history in the United States.
Former
WorldCom executive director and vice president David Myers in the same day as
Sullivan’s firing in June 2002, he resigned on grounds of irregular accounting.
(WorldCom, a US telecommunications company, hides $3.8 billion in the largest
writing in US history.)
Former
WorldCom financial officer Buford “Buddy” Yates For his part in the
crime, he was convicted and sentenced to one year and one day in jail.
Betty
Vinson is a former chief financial officer of WorldCom corporations. For his
part in the fiasco, he was sentenced to five months in jail.
Jack
Grub man – At the time of the controversy, he was a Wall Street commentator. He
had close ties with key members of many of the biggest organizations, and he
gave financial guidance to clients through them. He encouraged people to
purchase WorldCom stock as well as sell it. He claims he was completely unaware
of the controversy before it became official. He has been barred from working
in the defense industry for the rest of his life and has been fined $ 15
million. He couldn’t be charged with malicious mischief as a crime.
How to Stay Out of Bankruptcy
It
is certain that the Board of Directors who were present when WorldCom planted
the seeds of its demise should have intervened to prevent the financial crisis.
While
the Report explicitly blamed the Ebbers for the fact that “… Fraud was the
product of the way WorldCom CEO, Bernard J. Ebbers, handled the Company… was
a source of culture, and a lot of strain, which caused this fraud,” the
Board of Directors undoubtedly shares responsibility for the event. “…
The situation in which it occurred was characterized by a significant lack of
corporate governance…”, according to the Study.
Following
the public announcement on June 25, 2002, new steps were taken right away to
transform WorldCom and regain public confidence in the business. This is the
first significant one. The transition was the replacement of senior management.
Ebbers quit early this year, Sullivan was fired, and Myers resigned, all thanks
to a big loan he had taken from the company. There is a new administration in
the White House. The new COO, CFO, general counsel, and internal director
management have no previous affiliation with WorldCom. The Board of Directors
was restructured from the ground up. A modern Board of Directors that
guarantees transparency while still scrutinizing management decisions. The
treasury and finance department in Clinton, Mississippi, where bribery was
discovered, was shut down (Breeden, 2003). As a result, all suggestion of
wrongdoing in the business has been removed.
Although
more than 400 new financial and accounting staff were hired, 17,000 of
WorldCom’s 85,000 former employees were laid off. A new forensic auditor was
present when the false financial statements were sent for inspection. Excessive
products were inspected for flaws, and positive registrations from prior
purchases were noted. Stock options were then phased out, and the stock was
limited to the full payout value of share capital acquisitions (Breeden, 2003).
The stock price, which peaked at $ 64.50 in 1999, plummeted to $ 0.83 on July
21, 2002, when the company filed for Chapter 11 bankruptcy protection. Internal
safeguards have been strengthened as a result of a comprehensive review.
Finally, through executive training systems, a new code of ethics was implemented
to remind workers on their obligations to the corporation as well as accounting
problems that may suggest anomalies (Breeden, 2003). Although WorldCom’s latest
introduction of the controls demonstrates its commitment to renewal, these
reforms were, sadly, just what WorldCom needed to prevent fraud from the start.
Anything may have been found if the corporate audit department had been given
the freedom to do its job properly after the takeover. In the meantime, Cooper.
The organization has provided the Board with a slew of machine failures, none
of which have been prioritized, due to a lack of interest within the service.
Lessons
What do we infer from the reasons for
WorldCom’s deception?
It was predicted that WorldCom’s
internal climate would change. I believe that even if there had been no
bribery, the business would have failed earlier than it has.
Really, he did. The manipulation worked
like a gum line clearing a dam hole. It was a storm outside that forced the
gums to loosen their hold. Finally, an investigation deficiency was the lack of
qualified personnel for the discovery and reconstruction of the pit.
WorldCom’s organizational issues also
included a lack of a viable internal policy and poor controls, a hostile
culture requiring high returns, and a refusal to do what was best for the
company’s equity owner and stock manager.
While the company’s success is vital to
its stability, the company must still focus on the long-term rather than the
next quarter’s study. The business emphasises that by doing so, it creates
value for both Wall Street and its customers, who are the company’s main
drivers.
Employees are also responsible for the
company’s development and performance. WorldCom’s competitive culture, on the
other hand, was seen as being obedient to management in terms of behavior,
fairness, and dignity (“doing what is right”).
The Board of Directors has operated like
a self-contained internal regulation that has collapsed.
The Board’s job was to fix the company’s
flaws that the management couldn’t perceive because of the company’s lack of
independence. The Board, on the other hand, seems to be unwilling to stand on
its own, since the majority of its members are Ebbers’ mates. As a result of
our relationship, I’ve learned a lot.
Rather than doing its job of protecting
the shareholders, the board kept searching for a more agreeable management.
The Audit Committee, which was part of
the Board, was in charge of communicating with the internal and external
auditors. It was absolutely inactive contacting one of the auditors for just
three or six hours a year. Despite the fact that Arthur Andersen told the
Committee that WorldCom had abused GAAP, committee members decided to disregard
this information.
To the already weakened home, the
exterior atmosphere was a hurricane. ‘The’
The company’s stock price has dropped
even further after the Internet and telecom bubbles burst. This drop is
countered by Jack Grub man’s continued “buy” recommendations.
WorldCom is a company based in the
United States.
Finally, we can see where the business
seems to be based on the things we’ve learned from these causes.
It works better in an open setting, and
the internal auditor is in charge of conducting the search. Furthermore, an
external auditor should join on purpose, with an objective mind set, and assess
an organization with transparency, fairness, and freedom.
When setting a target in an organization,
one must organize, design, execute, and evaluate. The data gathered during the
analysis process shows that there is a presence.
The most valuable rules, which include a
comprehensive structure for usage and maintenance I Organization, are
available. Unfortunately, while businesses fail to prepare and design a
community of strong work ethic, which, for example, already appears in these
rules, companies fail to enforce it.