Transcript of "How Unethical Practices Almost Destroyed WorldCom"
Group Members• Amit Yadav• Samarpal Singh• Ravindra Kumar• Apporva Verma• Saurabh Tripathi• Udit Varshney• Vimal Verma
WORLDCOM LEADERSHIPCEO Bernard Ebbers CFO Scott Sullivan
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)
• 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.
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
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.
Reasons for the fiascoCorporate cultureVariety of peopleAcquisition of various business entitiesDepartment were distant from each otherHierarchical nature of the organization
Inorganic growthAcquisition of business unitsFinanced by companies high value stockIndustrial slow growth rate and recession
Failing leadershipNo technical qualification , no experiencePriority to personal interest over organizations interest.No backup plan
Unconcerned and Malfunctioning Board of directorsUnalert top managementWhimsical CEOLarge pay packages of top executivesUnreasonable long tenures of board membersUnreasonable loans and benefits given to Ebbers
Other reasonsRecession of the economyVast oversupply of capacityUnhealthy focus on profits
THE FINANCIAL MESSSEC 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
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.
Decline the value of stockWorkforce cut down drasticallyCustomerFinancial institutionsThe Indian connection
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.
• 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.
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
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
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
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
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