Auditing

Course Code: FIN 320

Course Teacher: Roushanara Islam

Assistant Professor
Jagannath Univerity
 The WorldCom
Accounting Scandal
(The Causes and the
Consequences)
Presented by : Group- 01

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Ruhul Amin
ID: B-150203107

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 Overview of the WorldCom

WorldCom was not just the biggest accounting scandal in the history of the United States, but also one of the biggest
bankruptcies. WorldCom has become a byword for accounting fraud.
Because of the expansive economic growth of the late 1990s, the expectations of company’s performance was
increased. WorldCom, a telecommunications company, was a victim of these expectation that led the company to
deceive the public through fraudulent activities.
In this whole article, we will come to know, what led to the fraud, how the fraud grew, and what its effects were,
lessons can be derived to gain a better understanding of the reasons behind a fraud and to prevent future frauds from
occurring or growing as big as the WorldCom fraud did.

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 Background of the WorldCom
The former name of MCI. It started initially as a small company named Long Distance Discount Services (LDDS) in 1983.
In 1985 Bernard Ebbers was recruited as an early investor of the company and became its CEO. It went public four years
later. Ebbers helped grow the small investment into a $30 billion revenue producing company with acquisitions of other
telecomm business in less than a decade.
It merged with Advantage Companies Inc. to eventually become World Com Inc. LDDS grew acquiring more than 60
companies (spending more than $70 billion between 1991 and 1998, whilst also accumulating $41 billion in debt),
including MCI one of the leading telecommunication company; IDB WorldCom, a leading international carrier whose name
is adopted; WilTel, a major telecom carrier; and MFS Communications, an international phone company and parent of
UUNET, a prominent Internet provider. WorldCom Inc. was a major international telecommunications carrier, was a
provider of long distance phone services to business and residents. At the peck of the telecoms boom, it was valued at $
180 billion and employed 80,000 to 85,000 people with a presence in more than 65 countries. MCI Communication
Corporation was purchased by WorldCom in 1998 and became MCI WorldCom, with the name afterwards being shortened
to WorldCom in 2000.

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 Causes of WorldCom Scandal

• Internal Environment
• Auditing
• External Environment

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 Internal Environment
Lack of strategy
By 1998, WorldCom had been involved in mergers with sixty companies. Together, these transactions were valued at more
than $70 billion, the largest of which, MCI Communications Corporation (“MCI”), was completed on September 14, 1998,
and was valued at $40 billion .According to Smith & Walter (2006), WorldCom was motivated by the low interest rates and
rising stock prices during the 1990s. From the beginning it committed itself to the high-growth strategies that relied on
aggressive corporate actions that often involved “creative” accounting practices. Dick Thornburgh’s investigation of
WorldCom (2003) revealed a lack of strategic planning, while documents called “strategic plans” were found, they only
consisted of an overview of the company’s financial outlook that was not enough for strategic plan. They did not contain
any realistic strategic plans. There was no strategic committee and the decision makers mainly consisted of Ebbers,
Chief Financial Officer (“CFO”) Scott Sullivan (“Sullivan”), and Chief Operations Officer (“COO”) John Sidgmore (“Sidgmore”)
(Thornburgh). Due to the fast pace of the acquisitions as well as management’s neglect, the accounting systems at WorldCom
were unable to keep up with integration and efficiency.
WorldCom acquired the new companies, it failed to properly integrate the systems and policies that not only acquired the new
companies, it failed to properly integrate the systems and policies. To further this acquisition problem, the MCI merger caused
WorldCom to take on a huge debt load. In addition, MCI had a residential customer base with slower growth rates while
WorldCom had historically served business customers, a customer base consisting of high margins and less
turnover.
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 Company Culture
Top management’s managing style
The consistent pressures from top management created an aggressive and competitive culture that did not contain any
communication of the need for honesty or truthfulness or ethics within the company. In fact, one former executive reports that
the pressure became “unbearable-greater than he had ever experienced in his fourteen years with the Company”.
There was a large focus on revenues, rather than on profit margins and the lack of integration of accounting systems
allowed WorldCom employees to move existing customer accounts from one accounting system to another. This allowed the
reporting of higher revenues for WorldCom through which employees pocketed extra commissions.
efforts made to establish a corporate Code of Conduct received Ebbers’s disapproval. He often described the Code as a
“colossal waste of time.” The lack of a code of ethics at WorldCom shows that no training on awareness of fraud or ethics was
conducted. The employees at WorldCom did not have an outlet to express concerns about company policy and behavior
either. Special rewards were given to those employees who showed loyalty to top management while those who did not feel
comfortable in the work environment were faced with obstacles in their need to express their concerns. Due to the multiple
acquisitions, personnel didn’t maintain the proper communication within the different departments located in eastern
United States. Betty Vinson and Troy Normand, managers in CIinton’s Accounting Department, were told to make journal
entries on the instructions of the Director of General Accounting Buddy Yates.

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 Company Culture (cont.)
Top management’s managing style
There was lake of an ethical code and had the opportunity to compensate employees with stock options.
Employees at WorldCom received a lower salary than their counterparts at competitors such as AT&T and Sprint.
They focused more on revenues. Because ,the higher the revenues, the better the company appeared to Wall
Street which in turn led to a higher stock price and higher compensation for both employees and management.
Gene Morse, one of the internal auditors who helped discover the accounting fraud, had been given the senior level
director’s stock options package. If the stock had returned to its high and WorldCom had not fallen, his options would
have been worth over $900,000. Ebbers created an individualistic culture where loyalty to a person was more
important than loyalty to the company. This created an environment where the boss was not to be questioned.
Therefore Ebbers’s plan was the company’s plan. Sullivan was Ebbers’s right hand man. He and Ebbers had the
same managing style. Most of the information was not fully available to employees. Overall there was no positive
environment to minimize the fraudulent activities as there was no code of conducts in the company.

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