How Unethical Practices Almost Destroyed WorldCom
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How Unethical Practices Almost Destroyed WorldCom

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Presented by students of Shri ram murti ram smarak international business school in Business ethics and corporate governance

Presented by students of Shri ram murti ram smarak international business school in Business ethics and corporate governance

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  • 1. How UnethicalPracticesAlmostDestroyedWorldCom
  • 2. Group Members• Amit Yadav• Samarpal Singh• Ravindra Kumar• Apporva Verma• Saurabh Tripathi• Udit Varshney• Vimal Verma
  • 3. WORLDCOM LEADERSHIPCEO Bernard Ebbers CFO Scott Sullivan
  • 4. COMPANY BACKGROUND• Worldcom founded in 1983 in hattiesburg , mississippi• Initially called LDDS- Long Distance Discount Service• Bernard Ebber as CEO in 1985 Growth=survival $650000=$1.5 m• Worldcom went public in 1989• 1993-metromedia co. & resergens communication• 1995- william technology• 1998-Biggest acquisition($40 billion revenues)
  • 5. • 1999 sprint merger worth $129 billion crashed• Stock declined by 2000• Heavy loans unstabilized his position as he left he said• New CEO-John Sidgmore & CFO Scott Sullivan• investigation launched by :- SEC (Security exchange commission) Internal auditor• Purchased by Verizon communication on 2001 known as Verizon business.
  • 6. Truth Behind the Scandal• Unrealistic financial targets and inability to meet them• Recording of a/c entries without any evidences• Company was capitalizing its line costs. Line costs were operating expenses but classified as capital expenditure• False figures 3.055 Bn $ in 2001 & 797 Mn $ in 2002• In 2000 and 2001, WC claimed pre tax revenue of 7.6 and 2.4 Bn $ respectively. Later discovered as loss of 49.9 and14.5 Bn $ for the respective years• Reserve accounts were manipulated to increase figures• Two versions of accounts the actual version and the Final version for investors
  • 7. Nemesis catches up with world comAttempt to acquire sprint in oct 1999 but failed.Ebbers lacked strategic sense of direction and companystarted drifting.A company suffered financial crunch because of decline inrevenue,over capacity and huge debts.Fear amongst CEO and the top brass of the company.Stock price dropped to 0.5 $ in jan 2002.In june 2002,co. announced inflation of profits and improperaccounting of 3.9 Bn$.In august 2002,another 3 Bn$ was improperly accounted.
  • 8. Why WorldCom failed????
  • 9. Reasons for the fiascoCorporate cultureVariety of peopleAcquisition of various business entitiesDepartment were distant from each otherHierarchical nature of the organization
  • 10. Inorganic growthAcquisition of business unitsFinanced by companies high value stockIndustrial slow growth rate and recession
  • 11. Failing leadershipNo technical qualification , no experiencePriority to personal interest over organizations interest.No backup plan
  • 12. Unconcerned and Malfunctioning Board of directorsUnalert top managementWhimsical CEOLarge pay packages of top executivesUnreasonable long tenures of board membersUnreasonable loans and benefits given to Ebbers
  • 13. Other reasonsRecession of the economyVast oversupply of capacityUnhealthy focus on profits
  • 14. THE FINANCIAL MESSSEC revealed the fact thatWorldCom had a debt of 5.75billion dollar.WorldCom has also signeda deal with 26 banksaccording to which It has topay 2.65 billion dollar peryear.Banks agreed to give theloans without any collateral.WorldCom manipulated thevalue of its total assets
  • 15. WorldCom also defaulted to give 0.60 dollar on its MCI group tracking stock.This step was taken by WorldCom stating the fact that by this it can save upto 284 million dollar a year.
  • 16. How the stakeholders were affected?
  • 17. Decline the value of stockWorkforce cut down drasticallyCustomerFinancial institutionsThe Indian connection
  • 18. The Blame Game• Arthur Anderson was external auditor of WorldCom since 1989.• They denied any involvement in the Fiasco.• Arthur Anderson missed opportunities where they could have disclosed the fraud. They have been criticized for their way of handling WorldCom accounts books and policies.
  • 19. • Arthur Anderson had series of audit fraud including Enron and WorldCom.• Observers commented that Arthur Anderson could have paid more attention towards aggressive practices when it was aware of such practices before.
  • 20. Summary• WorldCom is not only about “greed”• Corporate fraud is the result of how a corporation is led, how employees are motivated, the nature of the work, and the degree of individual autonomy• Ethics training and compliance programs don’t work in a culture that is exclusively materialistic and that devalues the dignity of work and workers• The basic assumptions about how corporations are organized and run need to be rethought• Corporate executives must re-learn how to lead• Leadership training must be holistic, emphasizing free will, personal responsibility and transparency i.e.: continuous, open, information-sharing
  • 21. Why ‘good’ managers make bad ethical choices (Four Rationalizations To Justify Questionable Conduct1) Believe that the activity is not “really” illegal2) Believe that it is in the individual’s or corporation’s best interest3) Believe that it will never be found out4) Believe that the company will condone actions that are taken in its interest and will even protect the managers responsible 21
  • 22. Conclusion A good way to avoid management oversights is to subject the control mechanisms themselves to periodic surprise audits… The point is to make sure that internal audits and controls are functioning as planned It is a case of inspecting the inspectors and taking the necessary steps to keep the controls working efficiently It is up to Top Management to send a clear & pragmatic message to all employees that good ethics is still the foundation of good business 22
  • 23. Key Take Aways• No job is worth breaking the law or committing unethical acts for• Your personal integrity is your most important asset – you own it and control it What will it profit a man if he gains the world but loose his own soul? (Mark 8:36)JesusChrist