Accounting Fraud at World Com Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Accounting Fraud at World Com

World com is a telecommunications company having more than $30 billion of revenues, $104 billion in assets, and 60,000 of employees, which has filed for bankruptcy under the chapter 11 of the US bankruptcy code. The bankruptcy was a result of significant fraudulent behavior and misappropriation of expenses and overstatements of the company’s revenues and earnings by the top management of the World com.This includes overstatement of pre-tax income by at least $7 billion, and this intentional miscalculation was largest in the history of the companies in United States of America.

As a result of intentional manipulation and fraudulent behavior of the top management, the company subsequently wrote down its reported total assets of $82 billion. The stock of the company was worthless, as in the past it was about $180 billion. Seventeen thousands of the total employees lost their employment due to the bankruptcy of the company and many left the company with worthless retirement accounts.

The reason of the company‘s bankruptcy was to make the 20 million retail customers to receive jeopardized services. It also affected the government contracts creating problems for the 80 million social security beneficiaries, air traffic control for Federal Aviation Association, network management for the defense department and long distance services for house of congress and the general accounting office.

Back ground of World Com Company:

World com’s start can be traced to the breakup of AT&T. Long Distance Discount Services began operations in 1984 by providing its services to the local retailers and commercial customers in southern states of USA where well-established long distance companies such as MCI and Sprint had little presence.

Long Distance Discount Services started its business with the capital of $650,000 however; soon it acquired $1.5 million of debt as the company lacks the expertise to handle the accounts of large companies that had complex switching system. For this reason, the company turned to Bernard Ebbers to run the operations, as he was one of the nine investors of Long Distance Discount Services.

Ebbers focused on the newly established firm’s internal or organic growth.He acquired small long- distance companies with limited geographic service areas and consolidating third tier long distance carriers with large market share. Long Distance Discount Services grew rapidly through acquisitions across south and west America and carried out foreign expansions in Europe and Latin America.

In the financial year of 1994, Long Distance Discount Services became public through merger with other companywhich was already trading in the NASDAQand by the end of 1993 the Long Distance Discount Services was the fourth largest company, which dealt with the long distance carrier in the United States of America. After shareholders’ vote in May 1995, Long Distance Discount Services was officially renamed to the WorldCom.

Cause of fraud:

Internal Environment

Strategy

The top management’s strategic decisions at WorldCom were characterized by rapid growth through acquisitions. In 1998, WorldCom had been engaged in mergers with many companies. These transactions were valued at more than $70 billion, the largest of which, MCI Communications Corporation (MCI), was completed on September 14, 1998, and it was valued at $40 billion. Although the WorldCom expanded its corporate structure through the acquisitions however, it failed to integrate the systems and policies within the group, which were crucial for the process of the acquisition to become successful in delivering the returns to the company and to fulfill the target of growth of the company.Accounting Fraud At Worldcom Case Solution

The lack of internal controls gave the chance to the management and other officials responsible in the financial reporting of the company to make the manual adjustments without any question raised by seniors. This reduced the chance of detection of the misstatements.

The beginning of the failure of the World Com was its merger with the second largest telecommunication company; Sprit however the merger was not allowed by the US department of justice as the merger, according to the court, would create the anti-competitiveness in the telecommunication industry. This verdict of the justice department stopped the company to grow through the acquisitions and mergers and result in the downturn of the company......................

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