7 pages/≈1925 words
Business & Marketing
Worldcom scandal (Term Paper Sample)
the paper discusses the fundamental issues that resulted into the fall of worldcom, source..
Your name School Subject Fundamentally, the parting of corporate ownership from corporate management, has become subject of abuse by the executive, and this has evolved to be a subject of weighty concern. In previous years, a small number of powerful individuals owned as well controlled almost all leading corporations. However, today, all major corporations are being managed by experienced directors. As a consequence, this basic transfer of executive authority have witnessed the evolution of agency challenges wherein the agent of business, that is, the manager more than often puts personal interests above those of the corporation or the owner. To counter the issue of agency challenges is the root cause allied to the formation of diverse boards within organizations. Since these directors are more than often given legal powers to run the corporate organizations in terms of decision making as well as undertaking strategic actions, however, numerous cases have illustrated they have failed in this due to lack of motivation as well as enthusiasm, to effectively ascertain management as well as strategic measures are employed effectively. This may explain why proactive directors are merely an insignificant percent within all corporate boards. While, sedate directors, those who inadvertently allows the executive excess, unfortunately represent the broader side of corporate executives. A good illustration of how these dynamics are abused regards WorldCom which employed under total surveillances of it boards of director the unethical process of capitalizing on billions of dollars of its operating expenditures. Though ,the organization appeared to have healthy financial statements as relates to 2001 financial auditing, yet the contracted financial investigators eventually uncovered an error that was estimated to be $ 4 billion and this was allied to what they perceived as double counting of the corporations revenue. As a result WorldCom executives carried out fraud by overstating its revenues, property, equipment as well expense and this is more evident in 2000 and 2001 audits. Likewise, it swelled its cost of revenues to revenues as well as the change in cost pertaining to revenues in relation to shift in revenue. Using sophisticated auditing procedures the corporation’s activities showed suspicion activities, though, basic ratios didn’t show any instances of fraud but it was after critical analysis of the organizations doings that exposed how the top executives handled the organizations financial objectives. The group’s directors had viciously embarked on security frauds, false filing of statements to Security Exchange Commission including conspiracy to defraud the taxpayers. It is also evident that Myers under Sullivan authority compelled the organizations auditing unit to transfer millions of dollars as long-term capital expenses while they were line cost expenditures, and this made the company to look promising more than it was actually was (Van Ness,et al,2009). All through 1999 to early2002, WorldCom by then under the direction of Scott Sullivan (CFO), along with David Myers (Controller) plus Buford Yates (Director of General Accounting) employed improper accounting procedures to cover its plummeting financial state by fallaciously professing financial intensification as well as prosperity to augment the price of WorldCom's stock. The scandal was executed in two principal facets. First, WorldCom's auditing department was involved in underreporting its 'line costs' ,that’s ,interconnection fixed cost with other telecommunication organizations by capitalizing these expenses on the balance sheet rather than appropriately expensing them. Next, the corporation exaggerated proceeds with sham accounting entries from ‘commercial unallocated income accounts'. Though, the US government has over and again embarked on playing the historical role of overseeing that the economy as well as the business sectors is transparently managed, in most instances, this has failed and this can be testified by the WorldCom scandal (Morse and Bower,2003). Though, the era of monopolistic corporations have died, the boom for scandals appears to be increasing with the new technologies employed by these corporations (Van Ness and Seifert,2007). Despite the enactment of Sherman Antitrust law which was designed to check and regulate the growth of corporation’s economy through reasonable means, it never deterred WorldCom from cheating. And this explains why the WorldCom accounting scandal was a major headache to the federal government. The leading players in this scandal can be said to have been Jeffry Picower who is estimated to have gained more that $7 billion in regard to numerous investment projects associated with Bernard Madoff, though dubiously. Likewise, Madoff is also one of the principal architectures of this scandal. On the same breadth is Bernie Ebbers who was jailed for 25 years, Ebbers is on record as having taken over $ 350 million into his personal account as personal loans, and by the time the corporation came into its knees, WorldCom value in stock market plummeted from $64 per share to $1 and this saw the shareholders losing over$100 billion. Examining the WorldCom activities, it is evident that the board of directors directly authorized the massive conversing of its financial obligations, this is more evident in the way the corporation had inflated its revenues within a span of five consecutive quarters. More so, the termination of Sullivan and the instance acceptance of Myers resignation was ripe evidence that the organization was operating under well concealed accounting irregularities. Despite such massive fraud allegations and after the SEC filed massive fraud charges against WorldCom ,subsequently, the organization filed for Chapter 11 which is associated with bankruptcy protection and this is perhaps the largest ever bankruptcy filing known in the US history. It ought to be noted that chapter 11 bankruptcy permits the organization to carry on with its operations whereas attempting to negotiate payment with the creditors. The corporation had acquired long-distance provider MCI in early 1997, and had a capacity of serving an estimated 20 million clients nationally in addition to being the 2nd largest long distance carrier in the US including being a backbone of the nation’s internet (Velshi,2011). The scope of this fraud established that the corporate fraud in the US was flourishing and was equally affecting the market values including causing devaluation of diverse pension fund schemes. These activities are basically correlated to unethical accounting behaviors supported by the board’s executives. WorldCom had carefully covered its financial reporting and this involved providing wrong information as regards its yearly audits which were found to be highly manipulated, inappropriate as well as being etched on unlawful and inappropriate earning schemes and financial management. As established by federal investigators, the corporation has massive flaws in its revenue recognition and this involved fraudulent reporting in addition to phony expenses as well as reprehensible valuation of its revenues. While on the scope of expenses recognition, the company employed fraud approaches in relation to capitalization, deffereal of its expenses as well as inappropriate usage of its reserves which consisted of understaments of its actual expenses. More so, the aspects of business combination exposed countless elements of improper accounting employed and this reinforced the above mentioned improprieties in the company. Motives All the identified perpetrators had one thing in common, to make the maximum profits within the shortest time possible and to appear as if being the most successful architectures of one of the most sought corporation in the US. However, their intentions were overshadowed by personal interests which resulted into greed eventually culminated into unprecedented corrupt activities within the organization. None of the indicted executives had invested or joined the company with the primary objective of stealing from the public. From social perspective, the very nature of the scandal can be attributed to the dynamic problem associated with agency problem; in this case, their interests outweighed other corporate obligations endowed to them by the lawful authority as well as the corporation’s managerial objectives. And this tickled down to other executives within various units who were as well entwined in the scandal for not exposing the rot in the company. Controls Within the corporate world, transparency is of immense value, and as regards WorldCom ,employing proper financial reporting schemes would have prevented the fall. It ought to be noted that the company had progressively employed improper auditing measures which are seen to have played a role in concealing the rot by inflating its actual revenues as well as expenses. Thus, by employing the ethical accounting standards as enshrined under GAAP, the organization could have not succumbed to fraudulent activities. On the other hand if the board of directors could have given the company’s objectives a wider berth more than their individual interests, much could have avoided and the company could have operated within the acceptable means. The usage of analytical procedures would have adequately helped and this ought to be the approach other major corporations need to employ (Unknown Author, 2009). It ought to be noted that analytical procedures are evolving to be valuable elements for any given audit operations, it would be instrumental to assert that if the org...
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