Company and situation
According to Biegelman and Bartow (2012), WorldCom Group began in 1983 following the breakup of AT&T. It began as Long Distance Discount Services (LDDS) offering telecommunication services to local retail and commercial customers in the Southern States where the two major telecommunication companies – Sprint and MCI had little presence. The company grew by acquiring other companies and in 1993 it was declared the fourth largest long distance carrier in the US (Biegelman & Bartow, 2012). It was officially renamed WorldCom in 1995 and continued a period of great acquisitions of more than 60 companies. However, between 1999 and 2002, the company overstated its pre-tax income by more than $7 billion which was the largest deliberate miscalculation of tax in the history of the US. The mega tax fraud was the genesis WorldCom’s fall. It wrote down about $82 billion which was about 75% of its total assets and its stock which had previously been worth $180 billion almost worthless (Biegelman & Bartow, 2012). At that point about 17,000 employees lost their jobs and many of them left without worthy retirement benefits. Many of the 20 million retail customers also suffered. The situation also affected 80 million social security beneficiaries, Federal Air Aviation Association and the department of defense among others. In all, on July 21, 2002, WorldCom filed for bankruptcy protection under chapter 11 of the US Bankruptcy Code. At this point the company had more than $30 billion in revenues, a total of $104 billion in assets and more than 60,000 employees (Biegelman & Bartow, 2012, p.16).
Strengths weaknesses and alternatives
WorldCom had significant strengths that led to its steady and speedy growth. The CEO Bernie Ebbers started off by strengthening the company internally. He led the company to acquire small long-distance companies that had limited geographic service areas. He also consolidated the third tier long distance carriers that had large market shares. As such, the company enjoyed economies of scale which helped the company to stand out and compete well in a crowded market. It developed integrated service packages that helped it fair well over Sprint and AT&T (MClam, 2005). The company was also able to grow through acquisitions and it had the internal mechanisms to handle the acquired companies well for some time while ensuring that its moves brought it more profitability and growth. WorldCom’s ability to merge with big companies such as Advantage companies saw it become a publicly traded company with Nasdaq and this came courtesy of internal strengths (Kaplan & Kiron, 2007). These internal strengths saw the company rise to become the fourth largest long distance carrier in the US by 1993.
Some of the most significant weaknesses started to develop sometime before the company embarked on a period of great growth in the early 1990s. While still running as LDDS, WorldCom had started with $65,000 in capital which soon accumulated to $1.5 million in debt because the company lacked the technical expertise to handle accounts of some large companies which had some complex switching systems (Kaplan & Kiron, 2007). It seems that Bernie Ebbers previously from numerous blue collar jobs was not the right man for the job and the company owners should have obtained a more qualified person with experience in business and finance as the CEO.
It was a weakness for WorldCom to rely on the acquisition of other companies for its growth rather than cultivating a culture based on the internal inborn mechanisms. The collapse of the attempt to acquire Sprint proved that the company ought to have adhered to other avenues such as building on the companies acquired earlier instead of focusing efforts, finances and legal technicalities on further acquisitions (Kassem, 2012). When the leadership under Ebbers started to falter after the collapse of the Sprint deal it was time for WorldCom to turn to leaders from previously acquired companies such as MCI for leadership and strategies for growth.
When the expenses at WorldCom began to become a steadily increasing percentage of revenue the leaders should not have attempted to cover up the issue but should have sought other avenues to fight off competition such as aggressive marketing (Kassem, 2012). They could also have adopted a strategy to target a new market among other moves. They ought to have allowed the stock prices to rise and fall normally as they sought more financing from the investors to strengthen their stock.
The company also made some big blunders in making fraudulent cost-reducing and revenue enhancing mechanisms. It ought to have looked at ways of cutting down on the expenditure say through downsizing staff (Kaplan & Kiron, 2007). It could also have adopted philosophies such as Kaizen to reduce wastage and maximize production. The implementation of prudent compensation of employees based on merit could also have seen the company lower its expenses and increase its revenue. These moves could have safeguarded the value of the stocks.
Implementations
The first step in implementing changes at WorldCom had to be the proper and accurate valuation of tax fraud which was placed at $3.8 billion in expenses over five quarter (Kaplan & Kiron, 2007). This step was right in that it would provide a basis for the declaration of the company as bankrupt or provide a lifeline for the recovery of the company. The other implementation step necessary was the firing of all the leaders who masterminded the mega tax fraud. The firing of Chief Finance Officer (CFO) Scott Sullivan, Vice president David Myers and the CEO Bernie Ebbers paved way for full-blown investigations. It allowed for the previously cowed employees such as Cynthia cooper to help establish a fraud case against WorldCom and prevent further looting.
Recommendations
It was prudent for WorldCom to cooperate fully with the Securities and Exchange Commission as well as legal entities pursuing the fraudulent tax issues at the company. The cooperation would reduce the legal cases of non-compliance and non-cooperation thereby reducing the financial burden on the already embattled company (Office of Mental Health, 2015). The move to restate its financial results for all of 2001 as well as the first quarter of 2002 ought to have been backdated to early 1999 when the company started to get into tax fraud deals. Though financially damaging it would have given a lifeline of the company’s clients and investors on its willingness to start on a clean slate. In this case the company took $8.3 billion in cash flow off its books thereby wiping out all the profits that had been made during such times (Kaplan & Kiron, 2007).
The company’s leaders ought to have allowed the imminent loss in 2001 and the first quarter of 2002 by complying fully with tax regulations and adhering to all reporting procedures. This could have boosted the company’s chances of probably obtaining a state or federal bailout in case it continued to sink into further debt since past records would have shown it as a huge, trustworthy taxpayer.
Additional questions
Question 1. What are the pressures that lead executives and managers to “cook the books?”
The pressure leading executives to “cook the books” are to please the shareholders when the market forces lead companies to make losses.
Question 2. What is the boundary between earnings smoothing or earnings management and fraudulent reporting?
Fraudulent reporting is deliberate reporting of inaccuracies when the experts in the system know what ought to be done. Earnings management maybe genuine efforts made to make more sales or cut on costs.
Question 3. Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom?
The leaders had authority to grant or deny access to the accounting records. The accounting records ought to be kept by a person who is not closely associated with a publicly traded company.
Question 4. Were the external auditors and board of directors blameworthy in this case? Why or why not?
The internal auditors collaborated with the executives to cover up for tax fraud.
Question 5. Betty Vinson: Victim or villain? Should criminal fraud charges have been brought against her? How should employees react when ordered by their employer to do something they do not believe in or feel uncomfortable doing?
Betty was a victim. She was under pressure to do what was commanded by her bosses and she could not afford to lose her job as she was relied upon by her family.
References
Biegelman, M., & Bartow, J. (2012). Executive roadmap to fraud prevention and internal control creating a culture of compliance (2nd Ed.). Hoboken, NJ: John Wiley & Sons.
Kassem, R. (2012). Earnings Management and Financial Reporting Fraud: Can External Auditors Spot the Difference? Retrieved from http://wscholars.com/index.php/ajbm/article/viewFile/46/20
MClam, E. (2005). USATODAY.com - Ex-WorldCom exec Vinson gets prison, house arrest. Retrieved from http://usatoday30.usatoday.com/money/industries/telecom/2005-08-05- vinson_x.htm
Office of Mental Health. (2015). Top Ten Internal Controls to Prevent And Detect Fraud!
Retrieved from https://www.omh.ny.gov/omhweb/resources/internal_control_top_ten.html
Kaplan, R. & Kiron, D. (2007) Accounting fraud at WorldCom. Harvard Business School. September 14 2007.
