The document provides an overview of the rise and fall of WorldCom, a major telecommunications company that collapsed in 2002 due to accounting fraud. It discusses WorldCom's growth through acquisitions in the 1990s, the accounting investigation that revealed $3.8 billion in fraud, and the resulting bankruptcy. It then outlines recommendations to prevent future fraud, including strengthening corporate governance through independent boards and audits, implementing whistleblower policies, and securing financial reporting through controls and periodic reconciliations.
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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.
World's biggest financial scam. This presentation would give you all the information about the people who are engaged in the scam and they manipulated their data from balance sheet. How culprits were sent behind bars and what were the changes in Law that were done after this scam. For more understanding of case i will recommend to see the movie
" Enron- The smartest guy in the room"(2005)
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2. Introduction
The Rise and Fall of WorldCom
What Went Wrong and How?
Recommendations
Conclusion
3. The last couple of decades saw the fall of many
organizations
• Eg: Enron, Parmalat, Adelphia Communications Corp and
Global Crossing Ltd
Main Reasons for their fall:
• Recessions
• Accounting Fraud
• Criminal Activities
• Corruption
• Mismanagement of Assets and Operations
Some Companies ended up bankrupt while
some were able to recover and continue
operations
4. Established in 1983 by Murray Waldron and William
Rector.
First named Long-Distance Discount Service (LDDS).
The company provided long distance telephone calls
at a discount.
Investor Bernard Ebbers joined the company and
was appointed as CEO.
Ebbers strategy was to grow through Mergers and
Acquisitions and was involved in close to 64 mergers
and acquisitions over the years
Was the second largest telecommunication provider
in the US and largest Internet Provider
5. The company grew mainly through its M&A strategies
The company's first acquisition was Advantage Companies in
1989 through which the company went public
Other Major Mergers and Acquisitions
• 1992
Acquired Advanced Telecommunications Corp
USD 850 Mn (Stock to Stock)
• 1993
Acquired Resurgens Communications Group Inc and
Metromedia Communications Corp
Long Distance Service Providers
USD 1.25 Bn (Stock to Stock and Cash)
6. Other Major Mergers and Acquisitions (cont’d)
• 1994
Acquired IDB Communications Group
Domestic and International Network Provider including data
connections, TV, Radio and Mobile Satellite Communication
capabilities
USD 936 Mn (Stock to Stock)
• 1995
Acquired Williams Telecommunications Group
Voice and Data Transmission Company
USD 2.5 Bn (Cash)
Changed name to WorldCom
• 1996
Mergers with MFS Communications Company and UUNet
Technologies
MFS was into communication for business and governments in US and
Europe. UUNet was a internet service provider
USD 12 Bn (Stock to Stock)
7. Other Major Mergers and Acquisitions
(cont’d)
• 1998
Merged with MCI
Long distance service provider
USD 40 Bn (Stock and Cash)
The largest deal at that time and led to increase in
shareholder value and exceptional customer service
Merged with Brooks Fiber Properties
USD 1.2 billion
Merged with CompuServe
Internet provider for business and personal use
USD1.3 billion
8. Other Major Mergers and Acquisitions
(cont’d)
• 1999
In talks with Sprint for a merger
Estimated value USD 129 Bn
Share Price reached a high of USD 65. 00 per share
Merger was blocked by the US Department of Justice
and European Regulators fearing the violation of
Celler-Kefauver Antimerger Act
Both parties decided to terminate their merger
agreement
• 2001
Merged with Intermedia
Internet service provider
9. In 2002, the Securities and Exchange
Commission started their investigation on
accounting policies and loans to executives
Consequences of the Investigation
• Lost Value with share price falling to pennies
• Around 20,000 Job Cuts
• Exited certain business sectors
• CEO Ebbers resigned
• CFO Sulivan was sacked
• Was listed as “Junk” status
• Filed for Bankruptcy
10. Over expansion strategies & industry
recession
Increase in E/R ratio
• WorldCom outsourced
some portions of its calls
Hefty fines for unutilized
leased networks.
• Paid the outside service
providers for carrying
WorldCom customers’
Decline in the growth of
telecommunication industry
calls on their lines.
reducing the demand
• Took majority of its lines
on lease. Anticipated high demand in the
industry. Increased their leased
networks
11. • Prices for long-distance communication
services were falling
DOT COM Bubble Burst
Refusal of merger with Sprint (Largest wireless network company then) by
US Justice Department to regulate the Telecommunications Industry.
12. Accounting fraud
EEXXPPEENNSSEE VVSS CCAAPPIITTAALL
EEXXPPEENNDDIITTUURREE
WorldCom’s CEO Ebbers
and CFO Sullivan
Cooper‘s internal audit team discovered $2.3 billion fraud
including $500 million in undocumented computer expenses
13. LLaacckk ooff ccoorrppoorraattee
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Board of Directors
• Did not make any attempt to control organization’s debt levels - WorldCom is
accounted for over 250 million dollar credit issued to Telecommunications
Customers.
• approved billions of dollars without any management information and without
even considering the terms and conditions or implications of the deal.
-WorldCom has paid 22.8 million dollars in revenue for Early Termination
Penalties.
Audit
Internal audit
•The internal auditing operation within the company was purposely diverted away
from auditing responsibilities and concentrated upon increased efficiencies and
cost-cutting instead of searching on internal affairs.
•understaffed, underpaid and under-qualified to carry out a responsible internal
audit function.
External audit
•Arthur Andersen the external auditing team identified WorldCom as a “maximum
risk” client, but failed to act consistently and overlooked serious deficiency in the
accounting ledgers
.
Personal Finances
• Many senior executives, including the CEO Ebbers had private finances and
debts taken on stocks of the company. The board approved over 400 million
dollar loans to Ebbers, without any assurances or knowledge of use of those
funds
14. CCoorrppoorraattee CCuullttuurree
autocratic style of management and followed a top down approach
no outlet for employees to express their concerns.
Top hierarchy granted compensation and bonus beyond the
company guidelines to a select group of individuals based on
their loyalty to them
Senior officials favored those especially loyal, preferable from
financial, accounting and Investor relations departments leading
to bias between departments and employees
15. SSuummmmaarryy
-The domination of Ebbers and no checks and constraints placed
on his actions.
-For personal gains under pressure to meet numbers.
-Lack of corporate governance.
-Employees failure to communicate fraudulent activities
-A financial system with no control mechanism
-Audit company’s failure of the company and its culture
understanding
-Inadequate audit by independent auditors
16. Legal and Ethics Programs
The Risk Management Committee
The Audit Committee
The Board of Directors
Executive Compensation
Communication and Trainings
Secure Organization
Preventing Accounting Frauds
17. Legal and Ethics Programs
The best way to establish Ethics and Legal standards
is to communicate the Code of conducts which will
lead the employees in the direct path.
Ethics office
Legal Department
Ethics Programs
Diversity Issues
18. The Risk Management Committee
A committee to identify the major risk
factors of company and the strategies to
mitigate such risks with a minimum of three
independent directors with good
experience.
The committee must disclosure
company's risks in all documents. These
risks would include all processors of the
company from Technology, Networks,
Finance and many. The risk management
meetings can be set in certain time
duration but not less than six times in an
year.
19. The Audit Committee
• Leadership Rotation
• Use of Corporate Aircraft and Other Corporate
Assets
• Required Resources for Audit Committee
• External Audit Oversight
• Internal Audit
• Disclosure Review
20. The Board of Directors
• Meetings and Commitment
• Director Training and Retaining
• Qualification Standards for the Board:
A Director should not have any personal or financial
links with the CEO
A Director should not have any conflict of interest
with the company
Skills with regards to Ethics, Financial, senior
management expectance planning and control
21. Executive Compensation
Control over Severance Programs
Severance Programs are protection tool for an
employee if case of loss of employment where
the employee will be getting an income till they
finds another Job. Ebbers was paid exceptionally
long term Severance package.
Implement Strict Controls on Executive Loans
The company should ensure that there is a limit
to the executive loan scheme and should
accounted to repay in due time.
22. Communication and Trainings
Communication within an organization will help to prevent
fraud activities. An effective training programmes will
meet the below criteria:
It must fully cover the job roles and risks involved in
them.
Regular training programmes
Case studies of real world examples and necessary
actions
Clear and simple to understand
Whistle blowing and Open Communication
Employees should be given communication channels to
freely communicate any misconduct..
Confidentiality
Anonymity
Organization - wide Availability
Classifications and financial reporting Concerns
23. Secure Organization
• Set clear standards - Set clear standards objectives
and lead the organization towards the mission which
will help employees to work in line with company's
expectations.
• Check employee references - This will provide an
understanding of the employees background when
hiring. Human Resources will be able to identify if
anyone has come from credit, licensing and criminal
history.
• Information Security - Setting standards and
protocols in information retention policy. Also
keeping a track on employees who view sensitive
information very often.
24. Preventing Accounting Frauds
• Minimize Cash transactions :Policy that authorized person
will be able to sign off cash transactions.
• Periodical reconciliation with parties: The payables and
the receivables should be tallied regularly.
• Protect your paperwork: All transactions no matter how
small they are should be documented and all such
paperwork should be well filed and stored in a safe place
with only authorized personal to have access.
• Reconcile bank accounts and review statements: Bank
statements must be review against the cash statements
with deposits and payments.
• External Audit and surprise Internal Checks: Regularly
external audits should be arranged and conducted to
ensure that no deviations or frauds are taking place. In
addition checks should be carried out randomly by the
internal audit team to ensure that standards are being
followed.
25. To Implement the Sarbanes–Oxley Act
• It provides a comprehensive and clear structure of
the way of financial statement should be presented.
• The purpose of this act to provide confidence to
investors and accountability, reliability and
transparent of financial statements.
• Promotes penalties like fines and jail time etc if rules
are no met. As a part of this act it allows the top
executive of an organization to certify that the
presented financial statements are fair and accurate.
26. What the company thought of as good for
them, ended up being a reason for their
failure.
Proper controls along with strict internal and
accounting policies need to be in place.
Employee needs to be educated on ethical
and legal aspects.