Description
the accounting fraud at worldcom happen. How did they manipulate the reserves and how how did the ceo fooled the investors.
? Started as a small long distance service provider called
LDDS in Mississippi in 1983•
? Grew with acquisitions in the 90s ? Gone public in 1989 ? 4th largest company with $1.5 billion revenue in 1993 ? Became number two telecom company in 1998 after
MCI merger ($34.5 billion)
? Bernard J. Ebbers’ (CEO) principal business strategy: growth through
acquisitions
? 75 mergers and acquisitions of smaller companies. ? The peak: Acquisition of MCI in 1998 ? End of acquisitions with the forced abandon of Sprint merger because
of antitrust objections
? CEO’s pressure on subordinates (Mr. Sullivan –CFO) to feed Wall
Street’s double digit expectations expenditures
? Line costs are network lease cost which is more than half of
? $3.8 billion of line costs transferred to capital
expenditures between 2001 and 2002
? Another $3.8 billion was in improperly reported
earnings before taxes for 99, 00, 01 and first quarter 02.
? $ 80 billion write off on the assets
? Use two main methods to manipulate earnings
?Reduction of line cost ? June 25, 2002, $3.852 billion ? August 8,2002, $3.330 billion ?Total $7.182 billion ?Inflation of revenue ? Identified improper $958 million ? Questionable $1.107 billion ?Total $2.065 billion.
Line Cost Reduction
Release Of Accruals to Reduced Line Cost
Proper accounting procedure for the accruals
Estimate The Cost
WorldCom’s violation 1.Release accrual without analysis 2.Kept excess accruals 3.Release reserved accruals to reduce Cost
Recognize & Expense
Accrual the Liability
Pay bills & Reduce Accrual
Adjustment Of Accrual
What Accounting Fraud World Com Did
Capitalization of line cost
• Ongoing, operating expenses need recognize immediately
• Capitalized it to exaggerate its pre-tax income
Balance Sheet ………. Capital Expenditure …..
Income Statement ………. Line Cost ….. Depreciation … Pre-tax Income …
Shift To
Postpone Offset To Revenue
Total Assets …..
Revenue Inflation
Specific Revenue items
?Minimum Deficiency reserves
• •
•
4thQ of 99 –4thQ of 2001 : $312 million Arise from customer agreements that permit a telecommunications company to bill customers for usage amounts that fall below contractual minimum. Those charges are rarely collected later.
? When collectability cannot be established with reasonable assurance, GAAP does not permit recognition of revenue ? Early Termination Charges
• • 2ndQ of 2001 –3rdQ of 2001 : $30 million Main part of this amount from an account will never collect.
Manipulation of Reserves
? Companies often set aside reserves in order to cover foreseeable estimated costs and losses. ? WorldCom allegedly inflated the value of its reserves so as to create a hefty ‘slush fund’ that could be used to boost profits. ? The manipulation of reserves resulted in a profit irregularity of roughly $3.3 billion. ? At the time of WorldCom’s disastrous announcement in June 2002, Bernard Ebbers had more than $400 million in personal loans outstanding from the company. ? Arthur Anderson, the same auditors of Enron, claimed that Scott Sullivan withheld information during crucial audits. Arthur Anderson was replaced by KPMG in June 2002. ? The company would take large charges for assets like research and development that through accounting methods could be converted to a secret fund the company could tap whenever it needed a boost in earnings. Such cookie-jar reserves, as they are called, were widely used in the late 1990's. ? Subsequent investigation has brought the total losses resulting due fraudulent behavior by WorldCom executives to $11 billion.
From 1999 to 2000 • Revenue Increased from $37,120M to $39,090M
• The increase of Expense exceed
the growth of revenue
• Cost of Goods sold decreased from $15,951M to $15,462M • Net Income increased from $4,013M to $4,153M
• Accounts receivable increased from $5,746M to $6,815M
• Free Cash Flow decreased from $2,289M to $(3,818)M
Management Defaults
Management was talented in buying competitors, but was not up to the task of merging them. Dozens of conflicting computer systems remained, local network systems were repetitive and failed to work together properly, and billing systems were not coordinated even the capacity and engineers talent were not fully utilized. Marc Perkel's software company in Springfield, who was a major customer of WorldCom found his services to be blocked, frustrated with WorldCom's performance, he canceled the company's service. Yet, WorldCom continued to bill him for more than a year, adding charges each month, for phone lines to an office that no longer existed.
How Did CEO fool the Investors
Investors fell in love with the company for acquisition & the pace of growth, which pushed up the price of its stock, which in turn provided the currency for further acquisitions, which made investors happier and on and on. With a stock price that was high considering the company's earnings, WorldCom could acquire companies with lower price-earnings multiples, and because of simple math automatically increase its per-share earnings of WorldCom.
Share Price
• Mid 1999
? $64.50 a share
• Prior fraud announcement
? $2 a share
• After announcement
? below $1 a share
• Last Traded At
? $.06 a share
Summary
• WorldCom is not only about “greed” • Corporate fraud is the result of how a corporation is led, how employees are motivated, the nature of the work, and the degree of individual autonomy • Ethics training and compliance programs don’t work in a culture that is exclusively materialistic and that devalues the dignity of work and workers • The basic assumptions about how corporations are organized and run need to be rethought • Corporate executives must re-learn how to lead • Leadership training must be holistic, emphasizing free will, personal responsibility and transparency i.e.: continuous, open, information-sharing
CEO - WorldCom
Bernard Ebbers
Former Chief Executive Officer and founder of WorldCom. Ebbers, a former basketball coach, milkman and Sunday school teacher, was forced to resign in March 2002 as a result of the scandal.
Key Stakeholders/ Role-players
Scott Sullivan
Former Chief Financial Officer of WorldCom. Sullivan was fired due to his involvement in the scandal.
David Myers
Senior Vice-President and controller of WorldCom. Myers was fired due to his involvement in the scandal.
Buford Yates
Former Director of Accounting at WorldCom. Yates was implicated in the scandal and forced to resign.
Betty Vinson
Former Accounting Department Manager at WorldCom. Vinson was forced To resign due to her involvement in the scandal.
Key Stakeholders/ Role-players
Troy Normand
Former WorldCom Accounting Department employee. Normand was forced to resign due to his involvement in the scandal.
John Sidgmore
New Chief Executive Officer of WorldCom. Appointed to replace Bernard Ebbers in April 2002.
Arthur Anderson
Former auditors of WorldCom
KPMG
Auditing firm appointed to replace Arthur Anderson.
Business Ethics Analysis
• In the wake of the Enron disaster, the accounting scandal at WorldCom impelled the U.S. House of Congress to authorize a 77% boost in the SEC’s budget. Has the growth of this securities watchdog aided in the deterrence of corporate fraud, or merely provided a small public window into the depths of pre-existing corporate fraud?
• To what extent has investor confidence been damaged by the scandal? Will MCI shares ever reach the highs enjoyed by WorldCom? • To what extent can the WorldCom Board of Directors be held accountable? Will the recent implementation of the Sarbanes-Oxley Act be enough to compel Boards to act in such a way as to protect investor confidence and to avoid corporate fraud?
Sarbanes-Oxley Act
• Sarbanes–Oxley Section 302: Disclosure controls • Sarbanes-Oxley Section 401: Disclosures in periodic reports (Offbalance sheet items) • Sarbanes–Oxley Section 404: Assessment of internal control • Sarbanes–Oxley 404 and smaller public companies • Sarbanes–Oxley Section 802: Criminal penalties for violation of SOX
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both
• Sarbanes–Oxley Section 1107: Criminal penalties for retaliation against whistleblowers
Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title, imprisoned not more than 10 years, or both.
Provisions in Sarbanes-Oxley Act,2002
– establish an independent accounting oversight board, funded by public companies – increase funding for SEC enforcement of existing laws and regulations; – prohibit independent auditors from providing certain non-audit services; – require accounting firms to rotate lead partners on audit clients every five years; – require independent Board audit committees; – specify that audit committees hire, fire and oversee auditors; – ban certain company loans to executives; – ban sales of company stock by executives during pension plan “blackout” periods; – provide greater protections for whistle blowers; – lengthen the time investors have to file lawsuits for securities fraud; – increase penalties for securities fraud, document shredding and other white collar crimes; – redirect funds from SEC enforcement actions to investors victimized by securities fraud; – require more complete and timely information for investors; and – require CEOs and CFOs to certify accuracy of financial reports, subject to civil and criminal penalties.
References
• • • • • • • • • Case Study - Ethics Institute Of South Africa www.google.com Wikipedia http://www.worldcomnews.com/ http://edition.cnn.com/2003/BUSINESS/04/14/w orldcom/ USA Today Fun with Dick & James , 2005 Movie, Directed by Dean Parisot www.yahoo.com New York Times
doc_501354379.pptx
the accounting fraud at worldcom happen. How did they manipulate the reserves and how how did the ceo fooled the investors.
? Started as a small long distance service provider called
LDDS in Mississippi in 1983•
? Grew with acquisitions in the 90s ? Gone public in 1989 ? 4th largest company with $1.5 billion revenue in 1993 ? Became number two telecom company in 1998 after
MCI merger ($34.5 billion)
? Bernard J. Ebbers’ (CEO) principal business strategy: growth through
acquisitions
? 75 mergers and acquisitions of smaller companies. ? The peak: Acquisition of MCI in 1998 ? End of acquisitions with the forced abandon of Sprint merger because
of antitrust objections
? CEO’s pressure on subordinates (Mr. Sullivan –CFO) to feed Wall
Street’s double digit expectations expenditures
? Line costs are network lease cost which is more than half of
? $3.8 billion of line costs transferred to capital
expenditures between 2001 and 2002
? Another $3.8 billion was in improperly reported
earnings before taxes for 99, 00, 01 and first quarter 02.
? $ 80 billion write off on the assets
? Use two main methods to manipulate earnings
?Reduction of line cost ? June 25, 2002, $3.852 billion ? August 8,2002, $3.330 billion ?Total $7.182 billion ?Inflation of revenue ? Identified improper $958 million ? Questionable $1.107 billion ?Total $2.065 billion.
Line Cost Reduction
Release Of Accruals to Reduced Line Cost
Proper accounting procedure for the accruals
Estimate The Cost
WorldCom’s violation 1.Release accrual without analysis 2.Kept excess accruals 3.Release reserved accruals to reduce Cost
Recognize & Expense
Accrual the Liability
Pay bills & Reduce Accrual
Adjustment Of Accrual
What Accounting Fraud World Com Did
Capitalization of line cost
• Ongoing, operating expenses need recognize immediately
• Capitalized it to exaggerate its pre-tax income
Balance Sheet ………. Capital Expenditure …..
Income Statement ………. Line Cost ….. Depreciation … Pre-tax Income …
Shift To
Postpone Offset To Revenue
Total Assets …..
Revenue Inflation
Specific Revenue items
?Minimum Deficiency reserves
• •
•
4thQ of 99 –4thQ of 2001 : $312 million Arise from customer agreements that permit a telecommunications company to bill customers for usage amounts that fall below contractual minimum. Those charges are rarely collected later.
? When collectability cannot be established with reasonable assurance, GAAP does not permit recognition of revenue ? Early Termination Charges
• • 2ndQ of 2001 –3rdQ of 2001 : $30 million Main part of this amount from an account will never collect.
Manipulation of Reserves
? Companies often set aside reserves in order to cover foreseeable estimated costs and losses. ? WorldCom allegedly inflated the value of its reserves so as to create a hefty ‘slush fund’ that could be used to boost profits. ? The manipulation of reserves resulted in a profit irregularity of roughly $3.3 billion. ? At the time of WorldCom’s disastrous announcement in June 2002, Bernard Ebbers had more than $400 million in personal loans outstanding from the company. ? Arthur Anderson, the same auditors of Enron, claimed that Scott Sullivan withheld information during crucial audits. Arthur Anderson was replaced by KPMG in June 2002. ? The company would take large charges for assets like research and development that through accounting methods could be converted to a secret fund the company could tap whenever it needed a boost in earnings. Such cookie-jar reserves, as they are called, were widely used in the late 1990's. ? Subsequent investigation has brought the total losses resulting due fraudulent behavior by WorldCom executives to $11 billion.
From 1999 to 2000 • Revenue Increased from $37,120M to $39,090M
• The increase of Expense exceed
the growth of revenue
• Cost of Goods sold decreased from $15,951M to $15,462M • Net Income increased from $4,013M to $4,153M
• Accounts receivable increased from $5,746M to $6,815M
• Free Cash Flow decreased from $2,289M to $(3,818)M
Management Defaults
Management was talented in buying competitors, but was not up to the task of merging them. Dozens of conflicting computer systems remained, local network systems were repetitive and failed to work together properly, and billing systems were not coordinated even the capacity and engineers talent were not fully utilized. Marc Perkel's software company in Springfield, who was a major customer of WorldCom found his services to be blocked, frustrated with WorldCom's performance, he canceled the company's service. Yet, WorldCom continued to bill him for more than a year, adding charges each month, for phone lines to an office that no longer existed.
How Did CEO fool the Investors
Investors fell in love with the company for acquisition & the pace of growth, which pushed up the price of its stock, which in turn provided the currency for further acquisitions, which made investors happier and on and on. With a stock price that was high considering the company's earnings, WorldCom could acquire companies with lower price-earnings multiples, and because of simple math automatically increase its per-share earnings of WorldCom.
Share Price
• Mid 1999
? $64.50 a share
• Prior fraud announcement
? $2 a share
• After announcement
? below $1 a share
• Last Traded At
? $.06 a share
Summary
• WorldCom is not only about “greed” • Corporate fraud is the result of how a corporation is led, how employees are motivated, the nature of the work, and the degree of individual autonomy • Ethics training and compliance programs don’t work in a culture that is exclusively materialistic and that devalues the dignity of work and workers • The basic assumptions about how corporations are organized and run need to be rethought • Corporate executives must re-learn how to lead • Leadership training must be holistic, emphasizing free will, personal responsibility and transparency i.e.: continuous, open, information-sharing
CEO - WorldCom
Bernard Ebbers
Former Chief Executive Officer and founder of WorldCom. Ebbers, a former basketball coach, milkman and Sunday school teacher, was forced to resign in March 2002 as a result of the scandal.
Key Stakeholders/ Role-players
Scott Sullivan
Former Chief Financial Officer of WorldCom. Sullivan was fired due to his involvement in the scandal.
David Myers
Senior Vice-President and controller of WorldCom. Myers was fired due to his involvement in the scandal.
Buford Yates
Former Director of Accounting at WorldCom. Yates was implicated in the scandal and forced to resign.
Betty Vinson
Former Accounting Department Manager at WorldCom. Vinson was forced To resign due to her involvement in the scandal.
Key Stakeholders/ Role-players
Troy Normand
Former WorldCom Accounting Department employee. Normand was forced to resign due to his involvement in the scandal.
John Sidgmore
New Chief Executive Officer of WorldCom. Appointed to replace Bernard Ebbers in April 2002.
Arthur Anderson
Former auditors of WorldCom
KPMG
Auditing firm appointed to replace Arthur Anderson.
Business Ethics Analysis
• In the wake of the Enron disaster, the accounting scandal at WorldCom impelled the U.S. House of Congress to authorize a 77% boost in the SEC’s budget. Has the growth of this securities watchdog aided in the deterrence of corporate fraud, or merely provided a small public window into the depths of pre-existing corporate fraud?
• To what extent has investor confidence been damaged by the scandal? Will MCI shares ever reach the highs enjoyed by WorldCom? • To what extent can the WorldCom Board of Directors be held accountable? Will the recent implementation of the Sarbanes-Oxley Act be enough to compel Boards to act in such a way as to protect investor confidence and to avoid corporate fraud?
Sarbanes-Oxley Act
• Sarbanes–Oxley Section 302: Disclosure controls • Sarbanes-Oxley Section 401: Disclosures in periodic reports (Offbalance sheet items) • Sarbanes–Oxley Section 404: Assessment of internal control • Sarbanes–Oxley 404 and smaller public companies • Sarbanes–Oxley Section 802: Criminal penalties for violation of SOX
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both
• Sarbanes–Oxley Section 1107: Criminal penalties for retaliation against whistleblowers
Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title, imprisoned not more than 10 years, or both.
Provisions in Sarbanes-Oxley Act,2002
– establish an independent accounting oversight board, funded by public companies – increase funding for SEC enforcement of existing laws and regulations; – prohibit independent auditors from providing certain non-audit services; – require accounting firms to rotate lead partners on audit clients every five years; – require independent Board audit committees; – specify that audit committees hire, fire and oversee auditors; – ban certain company loans to executives; – ban sales of company stock by executives during pension plan “blackout” periods; – provide greater protections for whistle blowers; – lengthen the time investors have to file lawsuits for securities fraud; – increase penalties for securities fraud, document shredding and other white collar crimes; – redirect funds from SEC enforcement actions to investors victimized by securities fraud; – require more complete and timely information for investors; and – require CEOs and CFOs to certify accuracy of financial reports, subject to civil and criminal penalties.
References
• • • • • • • • • Case Study - Ethics Institute Of South Africa www.google.com Wikipedia http://www.worldcomnews.com/ http://edition.cnn.com/2003/BUSINESS/04/14/w orldcom/ USA Today Fun with Dick & James , 2005 Movie, Directed by Dean Parisot www.yahoo.com New York Times
doc_501354379.pptx