The document discusses the rise and fall of WorldCom, including its aggressive acquisition strategy, risky loans to executives, fraudulent accounting practices to inflate revenues and hide debts, and eventual bankruptcy. It analyzes WorldCom's financial ratios, z-score, and industry factors like the dot-com bubble burst that contributed to its decline. A whistleblower uncovered $3.8 billion in fraudulent line-cost accounting adjustments that hid expenses and misled investors.
5. CULTURE It was more than questionable whether WorldCom has effective, transparent process of application, evaluation, justified decision making, monitoring, risk assessment and follow up acquisition .
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8. TECHNOLOGY Lower demand for Long Distance services in market . WorldCom was weak in wireless network and Technology Attempted to achieve economies of scale by acquisitions Refusal of merger with Sprint (Largest wireless network company then) by US Justice Department to regulate the Telecommunications Industry.
11. CAPITALIZATION AND OTHER ADJUSTMENTS CAPITALIZATION Reduction to Line Costs by capitalization and other adjustments (in % of the total line cost) Avoided recognizing standard operating expenses when they incurred, instead postponed them into future saying “work in progress ” Improperly shifted these expenditures from income statement to balance sheet, increasing current income and inflating assets. Reducing line costs and capitalizing entries significantly improved the line cost E/R ratio. OTHER ADJUSTMENTS Improperly booked of $312 million in revenue associated with Minimum Deficiency C harges . Accounted for over $215 million of credits that it had issued to Telecommunications Customers. Recognized $22.8 million in revenue from Early Termination Penalties.
12. REACTIONS The business unit managers were sceptical about the fraudulent accounting practices but some, because of their timid nature and the existence of the stringent hierarchy in WorldCom, were suppressed while others silenced by a disguised view of reality and lucrative incentives. “ Our goal is not to capture market share or be global. Our goal is to be the No. 1 stock on Wall Street” – Ebbers, CEO “ I guess the only way I am going to get this booked is to fly to D.C. and book it myself. Book it right now, I can‘t wait another minute” – Myers , director of General Accounting, to Schneeberger on his refusal of releasing accruals. One senior executive described the pressure as “ unbearable—greater than he had ever experienced in his fourteen years with the company” Senior staff described the target of maintaining 42% E/R ratio as “ wildly optimistic, pure fantasy and impossible” CFO Sullivan talked to Vinson and Normand about their resignation plans : “Think of us as an aircraft carrier. We have planes in the air. Let‘s get the planes landed. Once they are landed, if you still want to leave, then leave. But not while the planes are in the air”
non-uniform accounting practices, prone to easy manipulations. Working according to Ebbers and Sullivan resulted in monetary incentives.
operational audits with the objective of uncovering potential cost savings rather than financial audits with the objective of safeguarding company assets In the large system, new risk-based evaluation methods, left gaps for intentional manipulations and frauds. Maintained good relations: Relied on reports provided by the financial dept of the company, without scrutiny. The board (Compensation Committee)approved ‘sweetheart loans’ (over $400 million) to Ebbers, without any collaterals or assurances or knowledge of use of those funds.which is totally unethical to the shareholders’ and employees’ interests.
Increase in E/R ratio
conducted her detective work was in secret, often late at night to avoid suspicion