The WorldCom scandal was a major accounting scandal that came to light in the summer of 2002 at WorldCom, the USA's second-largest long-distance telephone company at the time.
Could the WorldCom Scam been Avoided Under the direction of C.docxvoversbyobersby
Could the WorldCom Scam been Avoided?
Under the direction of CEO and co-founder Bernie Ebbers, WorldCom grew to become one of the largest telecom companies in the world. Ebbers was a growth advocate, acquiring more than 50 different firms. One of its biggest acquisitions was in 1997, when MCI was acquired for roughly $37 billion. In less than two decades, WorldCom had grown from a small telephone company to a corporate giant, controlling about half of the U.S. Internet traffic and handling at least half of the e-mail traffic throughout the world. Having once been a highest-performing stock company, a plunge in 2002 forced the company into bankruptcy. During its success, WorldCom had established a large reserve account, from which monies were pulled to cover decreasing revenues, without auditor or investor knowledge. As these reserves dwindled, the company CFO, Scott Sullivan, ordered accountants to reclassify many of the company's OPERATING expenses as CAPITAL expenses. The result was an increase in operating income and a corresponding strengthening of the balance sheet to the tune of almost $4 billion. Eventually detected by auditors, the company was forced to file the largest Chapter 11 bankruptcy ever recorded. Thousands of employees lost not only their jobs, but also their entire retirement savings. The fraud cost investors billions of dollars as the company quickly went from a multibillion-dollar franchise to bankruptcy. Several company executives were indicted on counts of conspiracy and security fraud. The main perpetrator, Scott Sullivan (CFO), received a sentence requiring him to pay as much as $25 million in fines and serve up to 65 years in prison.
Using both the required text and external resources, address the question provided below. Responses should be unique and incorporate your personal perspectives that are supported by reading and research. Initial comments should be 1-2 paragraphs in length for each point. Follow-up postings should not exceed a paragraph and should add additional information or perspective to the original author's comments.
The Sarbanes-Oxley Act of 2002 has, in many ways, changed the role of financial statement auditors. In addition to ensuring financial statement accuracy, independent auditors are now required to review a company's internal controls and report their assessments in the company's annual report. How might these new policies help prevent financial statement fraud from occurring?
.
Could the WorldCom Scam been Avoided Under the direction of C.docxvoversbyobersby
Could the WorldCom Scam been Avoided?
Under the direction of CEO and co-founder Bernie Ebbers, WorldCom grew to become one of the largest telecom companies in the world. Ebbers was a growth advocate, acquiring more than 50 different firms. One of its biggest acquisitions was in 1997, when MCI was acquired for roughly $37 billion. In less than two decades, WorldCom had grown from a small telephone company to a corporate giant, controlling about half of the U.S. Internet traffic and handling at least half of the e-mail traffic throughout the world. Having once been a highest-performing stock company, a plunge in 2002 forced the company into bankruptcy. During its success, WorldCom had established a large reserve account, from which monies were pulled to cover decreasing revenues, without auditor or investor knowledge. As these reserves dwindled, the company CFO, Scott Sullivan, ordered accountants to reclassify many of the company's OPERATING expenses as CAPITAL expenses. The result was an increase in operating income and a corresponding strengthening of the balance sheet to the tune of almost $4 billion. Eventually detected by auditors, the company was forced to file the largest Chapter 11 bankruptcy ever recorded. Thousands of employees lost not only their jobs, but also their entire retirement savings. The fraud cost investors billions of dollars as the company quickly went from a multibillion-dollar franchise to bankruptcy. Several company executives were indicted on counts of conspiracy and security fraud. The main perpetrator, Scott Sullivan (CFO), received a sentence requiring him to pay as much as $25 million in fines and serve up to 65 years in prison.
Using both the required text and external resources, address the question provided below. Responses should be unique and incorporate your personal perspectives that are supported by reading and research. Initial comments should be 1-2 paragraphs in length for each point. Follow-up postings should not exceed a paragraph and should add additional information or perspective to the original author's comments.
The Sarbanes-Oxley Act of 2002 has, in many ways, changed the role of financial statement auditors. In addition to ensuring financial statement accuracy, independent auditors are now required to review a company's internal controls and report their assessments in the company's annual report. How might these new policies help prevent financial statement fraud from occurring?
.
A light explanation of Corporate Governance for those who want to have a quick understanding of the concept. This presentation was designed for a small team of mixed background individuals and enlightened them with the insight on the concept of Governance.
Models of Corporate Governance
CORPORATE GOVERNANCE SYSTEMS
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Cadbury Committee
Sarbanes Oxley Act, 2002
Global Corporate Governance
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A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
Contents of Memorandum of Association:
Name Clause: This clause states the name of the company, which should end with words like "Limited" or "Ltd." for a public limited company and "Private Limited" or "Pvt. Ltd." for a private limited company.
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Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
Objective Clause: This clause delineates the main objectives for which the company is formed. It's important to define these objectives clearly, as the company cannot undertake activities beyond those mentioned in this clause.
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Liability Clause: It outlines the extent of liability of the company's members. In the case of companies limited by shares, the liability of members is limited to the amount unpaid on their shares. For companies limited by guarantee, members' liability is limited to the amount they undertake to contribute if the company is wound up.
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Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
Association Clause: It simply states that the subscribers wish to form a company and agree to become members of it, in accordance with the terms of the MOA.
Importance of Memorandum of Association:
Legal Requirement: The MOA is a legal requirement for the formation of a company. It must be filed with the Registrar of Companies during the incorporation process.
Constitutional Document: It serves as the company's constitutional document, defining its scope, powers, and limitations.
Protection of Members: It protects the interests of the company's members by clearly defining the objectives and limiting their liability.
External Communication: It provides clarity to external parties, such as investors, creditors, and regulatory authorities, regarding the company's objectives and powers.
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Binding Authority: The company and its members are bound by the provisions of the MOA. Any action taken beyond its scope may be considered ultra vires (beyond the powers) of the company and therefore void.
Amendment of MOA:
While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
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2. Evolution of WorldCom
Incorporated in 1983 as Long Distance Discount Services (LDDS), based in
Jackson Mississippi by Bernard John Ebbers and other three investors.
Ebbers was named CEO of the company in 1985.
Became a Public Company in 1989 as a result of merger with Advantage
Companies Inc.
Changed the name to WorldCom Inc., in May 1995 With its eye on becoming a
global leader in telecommunications.
The company grew rapidly in the 1990s, after completing several mergers and
acquisitions.
From 1995 until 2000, WorldCom purchased over sixty other telecom firms. In
1997 it bought MCI for $37 billion. It was the largest corporate merger of US
history.
4. Motivation of the Fraud
Increased competition due to the deregulation of the act of 1996 which permitted
long distance carriers to compete for local services.
Personal financial circumstances of the CEO Bernard Ebbers.
The Company’s Performance Bonus Plan, which began in 1997, required, that an
executive officer achieve a ten percent increase in revenue for his or her unit over
the same time period the previous year.
Incompetent Board and Toxic Corporate Culture of ‘Not questioning the
superiors’ laid by the CEO Bernard Ebbers.
5. Violation of Accounting Principles
The fraud was contemplated by senior members of the corporate finance
organization, including Chief Financial Officer Scott Sullivan, Controller David
Myers, and Director of General Accounting, Buddy Yates, under the direction of
CEO Bernard Ebbers.
The fraud was accomplished primarily in two ways.
1. Reduction of reported line costs
Releases of accruals
Capitalization of operating line costs
2. Exaggeration of reported revenues
8. Corporate Governance Issues
Incompetent Board
No checks or restraints placed on the actions of Ebbers and CFO Sullivan by the
BOD. In fact, Ebbers controlled the Board’s agenda, its discussions, and its
decisions.
Lack of board of director’s attention to how the company was running.
Approval of various loans and loan guarantee to Ebbers to prevent him from fire
selling of the stock, as a response to the margin call.
Board of directors “habit of rubber stamping senior management decisions
without scrutinizing.
Systemic attitude conveyed from the top down that employees should not
question their superiors, but simply do what they were told.
Restricted access to Company’s computerized accounting system to handful of
people.
9. Toxic Corporate Culture and Synergetic
Corruption
Corporate culture dominated by CEO Bernard Ebbers. Ebbers resisted
establishing a code of conduct and he never rewarded or demanded an
ethical business practices.
Internal Audit reported directly to CFO Scott Sullivan.
Unjustifiable Bonus and Remuneration Packages. Ebbers alone received
27 million as a bonus in Stock Option in 1996 alone.
Inadequate Auditing by External Auditor, Arthur Anderson.
Lack of corporate environment for Whistleblowing.
10. Aftermath of the Scandal
In March 2002, SEC sent a WorldCom a” request for information”.
By the beginning of the June, a small team of Internal auditors at WorldCom
discovered fraudulent entries in the book of WorldCom.
On July 21, 2002, WorldCom and substantially all of its active U.S. subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code.
On April 14, 2003, WorldCom changed its name to MCI, and relocated its corporate
headquarters from Clinton, Mississippi, to Ashburn, Virginia.
WorldCom got a new Board of Directors and a new Chief Executive Officer; and a new
external auditor.
Nearly 30000 people lost their jobs and investors from 110 countries lost 175 billion.
11. Trail and Verdict
CEO Bernard Ebbers was convicted on nine counts of securities fraud
and sentenced to 25 years in prison in 2005.
CFO Scott Sullivan received a five-year jail sentence after pleading guilty
and testifying against Ebbers.
Controller David Myers, the third-ranking company executive and the director of
general accounting, Buford “Buddy” Yates, was sentenced to one year and one
day in prison.
12. Regulatory Reforms after the Scandal
Enactment of Sarbanes-Oxley Act.
Establishment of a new Public Company Accounting Oversight Board
A requirement that the external auditors report directly to the company’s audit
committee
Prohibition of Public accounting firm that audit the company from providing any
other services that could impair their ability to act independently in the course of
their audit.
13. Relevance of the Case today
To understand the importance of
Establishing a culture of legal compliance and integrity in the organization.
Accountability of audit committee and BOD in producing financial statements that fairly present
the financial condition and results of operations of the corporation.
Independent accounting firm to audit the financial statements prepared by management and
issue an opinion that those statements are fairly stated.
Corporate governance committee in playing a leadership role in shaping the corporate
governance of the corporation and the composition and leadership of the board.
An active and independent Board of Directors and Committees.
Effective checks and balances on the power of senior management.
Formalized and well-documented policies and procedures, including a clear and effective channel
through which employees can raise concerns or report acts of misconduct.