Table of Contents
Analysis of the issues:
WorldCom scandal is an important scandal that is known as the major accounting scandals of the time. The scandal was identified in the summer of 2002 in the company of WorldCom. As far as the company of WorldCom is considered, it is the USA's second-largest company that provides services related to long-distance telephone companies (Leetaru,2008). It was an important company and it was very strange and unusual for people that such a company could be involved in such a major scandal. The scandal of the company WorldCom was identified in between the tenure of 1999 to 2002. The WorldCom scandal was led by senior executives that were serving in WorldCom. Key personalities that were involved in this scandal were founder and CEO Bernard Ebbers of WorldCom company. They orchestrated a plan according to which they inflated the earnings so that they can maintain their worth in the stock market. They decided to make a smart plan in which they could boost their income by maintaining high WorldCom's stock price. The overview of the impacts of the scandal on the company and the issues that resulted in issues related to the WorldCom scandal. WorldCom scandal is an important and one of the largest scandals of the history of America (Leetaru, 2008).
As far as the act of disclosing the fraud is concerned, it was caught in June 2002 in the case when the company's internal audit was conducted. WorldCom scandal was disclosed by its own internal audit unit, and the president of the audit committee was Cynthia Cooper. In his internal audit, he discovered that there are more than $3.8 billion wrong income sheets. He discovered that there were multiple fraudulent balance sheet entries that were present in the record. As a result of this audit, WorldCom was pressurized and they had to admit that they overstated their assets. According to their claims, they had added wrong records of nearly $11 billion (Zekany, 2004).
It is one of the most important events of history and it was regarded as the largest accounting fraud that ever happened in American history. Owing to all of these astonishing discoveries, the Audit Committee requested KPMG to carry out their own research in this regard. Considering this request, KPMG conducted its own review of the WorldCom scandal. KPMG discovered that WorldCom had played very smartly in this scandal. According to their review, Sullivan had tried to move system costs by spreading it intentionally to various property accounts. This action played an important role and allowed them that they could book them as capital expenditures. As he used to trick of spreading the expenses, in the initial cases they were not obvious. The team of KPMG investigated the WorldCom engagement team and investigated them about the false entries and he claimed that he was not aware that they were fake entries. Audit Committee requested Sullivan to present a white paper in which he would explain the reason behind these fake entries. He presented his logic but he had no strong argument and both the Audit Committee and KPMG were not convinced by the logic (Zekany,2004).
According to the results of the review reports, the main reason and the motive behind the transfer of these amounts were to achieve the sole purpose of meeting Wall Street targets. The committee presented the point that according to them, the sole acceptable remedy that was available for WorldCom was to restate corporate earnings. They demanded that they needed the exact income statements for the year 2001 and for the first quarter of the year 2002. The demand that was presented by the team of the audit committee and KMPG was the resignation letters of Sullivan and all the Myers that were serving in WorldCom. WorldCom scandal is one of the important case studies of scandals related to accountings in America (Zekany,2004).
There were many important issues that were caused due to the introduction of the WorldCom scandal. WorldCom stock observed a fall from a height of $64.50 per share according to the statics of mid-1999 and became less than $2 per share. After the spread of the news about the WorldCom scandal, the average price of a share fell below $1 per share. After some time, WorldCom shares became pennies per share. Issues were faced by WorldCom employees that had planned about the company's stock and using them in their retirement plans. At the time of the declaration of bankruptcy, WorldCom had total assets of $103.8 billion in assets by end of March 2002. WorldCom had the debt of $41 billion in debt and they were bound to make payments. WorldCom bankruptcy is the case of the largest bankruptcy. WorldCom faced an important issue that the customers switched to other telecommunications carriers. WorldCom reduced 17,000 of its 85,000 employees (Leetaru,2008).
The case analysis of the WorldCom scandal depicts that it is one of the most shocking fraud cases in the World. The WorldCom scandal rocked Wall Street in a generation WorldCom was an important core dividend-paying stock and they falsely inflated the earnings on its profit as well as in loss statement. WorldCom scandal had an impact on the accuracy of the financial data, and it had a deep impact on the Income statement of the company. In addition to it, the WorldCom scandal had an impact on the balance sheet. WorldCom scandal also impacted the statics of Form 10-K filing and annual report of WorldCom. WorldCom company was able to conduct fraudulent accounting by involving the upper management. Chief Financial Officer (CFO) Scott Sullivan manipulated the capital expenditures and expenses and misguided the investors. WorldCom adjusted billions of dollars in operating expenses and tried to manage them in a capital expense account. The issues that raised due to this action of WorldCom was the fact that they were able to show expenses in smaller amounts (Lyke, 2002)
In other words, expenses spread over the span of years, and by doing this they were able to manipulate the investors and they were not bound to report these expenses to them immediately. By applying this technique, the company was able to manipulate the records to 2001. They raised the revenue generation to nearly $3 billion and by doing this they reported that WorldCom had $1.4 billion profit. They depicted that they were running a profitable business instead of a loss. The consequences could be understood by the fact that if WorldCom had honestly reported the operating costs, WorldCom would have lost huge money for the 2001 and early phases of 2002 (Leetaru, 2008).
If the consequences of the WorldCom scandal are considered, after the acceptance of corruption by WorldCom. On July 22, 2002, WorldCom filed for bankruptcy. After filing this bankruptcy, legal cases were filed on WorldCom CEO Bernard Ebbers and CFO Scott Sullivan. Ebbers was convicted on 9 counts of security fraud. He was placed in jail for the next twenty-five years as he was an important character of the scandal. Sullivan was convicted on seven counts of security fraud was charged with seven counts and he was placed in jail for the next five years. The legislation was also modified after the scandal of WorldCom and companies like Enron. American government passed a resolution named “Sarbanes-Oxley Act (SOX)”. The main aim of the resolution was to boost the confidence that investors had lost in financial markets and particularly in public companies. Public companies used to mislead and defraud investors by various shortcomings of legislation but this act addressed those issues. The legislation of SOX introduced various important changes like it increased the prevalence of various audit committees. The law also played an important role in making it compulsory for public companies to have internal controls. In addition to it, SOX imposed a restriction that not more than two board members could be certified as public accountants. SOX also increased criminal penalties for those people who were involved in securities fraud. In addition to it, the law made it compulsory for companies to change their audit partners every five years (Cernusca, 2007)
The research includes an overview of the impacts of the scandal on the company of WorldCom. The research includes the factors that resulted in issues related to the WorldCom scandal. The WorldCom scandal is an important accounting and one of the largest accounting scandals of the history of America. The employees, investors, company managers faced a lot of issues due to the WorldCom scandal. WorldCom scandal resulted in many lessons and important changes in legislation to prevent the occurrence of such frauds in the future. Therefore, the case study of the WorldCom scandal played an evident role in enhancing the legislation of America regarding accounting scandals.
Cernusca, L. (2007). Ethics in accounting: The WorldCom inc. scandal. Lex ET Scientia Int'l J., 14, 239.
Lyke, B., & Jickling, M. (2002). WorldCom: The accounting scandal. In Congressional Research Service Report for Congress, August (Vol. 29, pp. 1-6).
Leetaru, K. (2008). An open-source study of international media coverage of the WorldCom scandal. Journal of International Communication, 14(2), 66-86.
How One of the World's Largest Companies Made $3.8 Billion Disappear. (2020). Retrieved 10 October 2020, from https://www.thebalance.com/worldcom-s-magic-trick-356121
WorldCom accounting scandal. (2020). Retrieved 10 October 2020, from https://www.theguardian.com/business/2002/aug/09/corporatefraud.worldcom2
Zekany, K. E., Braun, L. W., & Warder, Z. T. (2004). Behind closed doors at WorldCom: 2001. Issues in Accounting Education, 19(1), 101-117.
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