Case Analysis

World.com
CEU - Bernard Ebbers
CFU - Scott Sultuvan

< World com was small Iirm in Mississippi which was incorporated in 1983 to resell
long distance telecom services
< :e to break :p oI the telecom giant AT& T in 1983 there were opport:nities emerging
in telecom market
< investors incl:ding Bernerd decided to take advantage oI this new market opport:nity
< They bro:ght L$ ( long distance disco:nt services ) with an objective oI reselling
AT&T long distance services to small and mid size b:siness
< ver a period oI time L$ was renamed as world Com as they grew thro:gh
acq:isitions and became 2
nd
largest telecom Iirm in U$
< :e to s:dden crash in stock market in 2000 , telecom ind:stry in :sa Iaced major
problems like
1. Massive capital investment
2. Excess capacity
3. Contin:o:s Iall in L$ prices
. M:ch lower demand Ior L$ services
< World com was severely aIIected by above problems
< World resorted to wrong acco:nting ( booking expenses as capital expendit:re ) to show
that they were making progress
< n 2002 d:e to losses Ebbers was eased o:t by Board oI irectors and New CE jhon
$idgmore was appointed
< n 2002 co. When co. identiIied its losses , it recalled debts Irom creditors and
negotiated compromised deal with its lenders which Iailed and company had to Iace
legal action bankr:ptcy
< The main reason Ior this downIall oI world com co:ld be :
< gnored market conditions or miscalc:lation oI demand it created excess capacity was
created
< Adverse nd:stry conditions
< !oor Exec:tion oI merger integration
< Two Billing programmes were being r:n sim:ltaneo:sly creating h:ge pendency oI
receivables
< Bad acco:nting practices
< #elaxed #eg:latory Environment WorldCom a:ditors never challenged the illegal
acco:nting taking place since 1999
< !oor Top Management

Case Questions:

.)Wbot ore tbe oJvontoqes onJ JisoJvontoqes of on

Aqqressive merqer Policy like tbot ot WorlJCom
dvantages of an ggressive Merger Policy

< WorldCom achieved its position as a signiIicant player in the telecomm:nications

ind:stry thro:gh the s:ccessI:l completion oI 65 acq:isitions.
< Two oI these acq:isitions were partic:larly signiIicant. The MF$ Comm:nications
acq:isition enabled WorldCom to obtain UNet, a major s:pplier oI nternet services to
b:siness, and MC Comm:nications gave WorldCom one oI the largest providers oI
b:siness and cons:mer telephone service
< By 1997, WorldCom's stock had risen Irom pennies per share to over $60 a share.
Thro:gh what appeared to be a prescient and s:ccessI:l b:siness strategy at the height oI
the nternet boom.
< As the stock val:e went :p, it was easier Ior WorldCom to :se stock as the vehicle to
contin:e to p:rchase additional companies. The acq:isition oI MF$ Comm:nications and
MC Comm:nications were, perhaps, the most signiIicant in the long list oI WorldCom
acq:isitions.
isadvantages

< $enior management made little eIIort to develop a cooperative mindset among the
vario:s :nits oI WorldCom.
< nter-:nit str:ggles were allowed to :ndermine the development oI a :niIied service
delivery network.
< WorldCom closed three important MC technical service centers that contrib:ted to
network maintenance only to open twelve diIIerent centers that, in the words oI one
engineer, were d:plicate and ineIIicient.
< Competitive local exchange carriers (Clercs) were another managerial nightmare.
WorldCom p:rchased a large n:mber oI these to provide local service

. Wbot Hotivotion coulJ exploin tbe frouJulent occountinq
ot WorlJCom
< To increase its market share
< WorldCom was m:ch interested in acq:isition
< To project better perIormance oI company in eyes oI shareholders.
< To be ahead oI its competition




Enron Case
CEU- Kennetb Lay
CFU- ndrew Faustow

Auditing Firm- Arthur Anderson
Enron Corporation is an energy trading, nat:ral gas, and electric :tilities company based in
Ho:ston, Texas that employed aro:nd 21,000 people by mid-2001, beIore it went bankr:pt.
Fra:d:lent acco:nting techniq:es allowed it to be listed as the seventh largest company in the
United $tates, and it was expected to dominate the trading it had virt:ally invented in
comm:nications, power, and weather sec:rities.
Enron cynically and knowingly created the phony CaliIornia electricity crisis oI 2000 and 2001.
There was never a shortage oI power in CaliIornia. Using tape recordings oI Enron traders on the
phone with CaliIornia power plants, the Iilm chillingly overhears them asking plant managers to
"get a little creative" in sh:tting down plants Ior "repairs."
ts E:ropean operations Iiled Ior bankr:ptcy on November 30, 2001, and it so:ght Chapter 11
protection in the U.$. on ecember 2.Enrson's global rep:tation was :ndermined, by persistent
r:mors oI bribery and political press:re to sec:re contracts in Central and $o:th America, in
AIrica, and in the !hilippines.
Especially controversial was its $30 billion contract with the Maharashtra $tate Electricity Board
in ndia, where it is alleged that Enron oIIicials :sed political connections within the Clinton and
B:sh administrations to exert press:re on the board. n Jan:ary 9, 2002, the United $tates
epartment oI J:stice anno:nced it was going to p:rs:e a criminal investigation oI the Enron
scandal and Congressional hearings began on Jan:ary 2.
AIter a series oI scandals involving irreg:lar acco:nting proced:res bordering on Ira:d involving
Enron and its acco:nting Iirm Arth:r Andersen, it stood at the verge oI :ndergoing the largest
bankr:ptcy in history by mid-November 2001. A white knight resc:e attempt by a similar,
smaller energy company, ynegy, was not viable. :ring 2001, Enron shares Iell Irom U$$85 to
U$$0.30. As Enron was considered a bl:e chip stock, this was an :nprecedented and disastro:s
event in the Iinancial world. Enron's pl:nge occ:rred aIter it was revealed that many oI its proIits
and reven:e were the res:lt oI deals with special p:rpose entities.
The res:lt oI this acco:nting scandal was that many oI the losses that Enron enco:ntered were
not reported in its Iinancial statements. Following the 2001 bankr:ptcy Iiling, Enron has been
attempting to restr:ct:re in order to compensate as many creditors as possible. Enron's
innovative core energy trading b:siness was sold early in the bankr:ptcy proceedings to Merrill
Lynch and Company. A last-ditch s:rvival attempt was made in 2002 thro:gh a planned merger
with arch-rival ynegy Corporation. ynegy backed o:t d:ring merger talks, acq:iring control
oI Enron's original, predecessor company- Northern Nat:ral Gas- in the process.

) wbot lessons bove you leornt from enron soqo?
(1) There sho:ld be a healthy corporate c:lt:re in a company. n Enron`s case, its corporate
c:lt:re played an important role oI its collapse. The senior exec:tives believed Enron had to be
the best at everything it did and the shareholders oI the board, who were not involved in this
scandal, were over optimistic abo:t Enron`s operating conditions. When there existed Iail:res
and losses in their company perIormance, what they did was covering :p their losses in order to
protect their rep:tations instead oI trying to do something to make it correct. The 'to-good-to-be-
tr:e sho:ld be paid more attention by directors oI board in a company.

(2) A more complete system is needed Ior owners oI a company to s:pervise the exec:tives and
operators and then get the idea oI the company`s operating sit:ation. There is no do:bt that more
governance Irom the board may keep Enron Irom Ialling to bankr:ptcy. The boards oI directors
sho:ld pay closer attention on the behavior oI management and the way oI making money. n
addition, Enron`s Iall also had strikingly bad inIl:ence on the whole U.$. economy. Maybe the
government also sho:ld make better reg:lations or r:les in the economy.

(3) 'Mark to market is a plan that JeIIrey $killing and Andrew Fastow proposed to p:mp the
stock price, cover the loss and attract more investment. B:t it is impossible to gain in a long-term
operation in this way, and so it is clearly immoral and illegal. However, it was reported that the
then U$ $ec:rity and Exchange Commission allowed them to :se 'mark to market acco:nting
method. The ignorance oI the drawbacks oI this acco:nting method by $EC also ca:sed the Iinal
scandal. Th:s, an acco:nting system which can disclose more Iinancial inIormation sho:ld be
created as soon as possible.

() Maybe b:siness ethics is the most thesis point people doing b:siness sho:ld Ioc:s on. As a
loyal agent oI the employer, the manager has a d:ty to serve the employer in whatever ways will
advance the employer's selI-interest. n this case, they violated the principle to be loyal to the
agency oI their EN#N. Especially Ior acco:ntants, keeping a Iinancial statement disclosed with
tr:e proIits and losses inIormation is the basic responsibility that they sho:ld Iollow.


) wbot Jo you tbink ore tbe reosons for tbe suJJen collopse
of enron?
The lack oI tr:thI:lness by management abo:t the health oI the company, according to Kirk
Hanson, the exec:tive director oI the Markk:la Center Ior Applied Ethics. The senior exec:tives
believed Enron had to be the best at everything it did and that they had to protect their
rep:tations and their compensation as the most s:ccessI:l exec:tives in the U.$.
t has been s:ggested that conIlicts oI interest and a lack oI independent oversight oI
management by Enron's board contrib:ted to the Iirm's collapse. Moreover, some have s:ggested
that Enron's compensation policies engendered a myopic Ioc:s on earnings growth and stock
price. n addition, recent reg:latory changes have Ioc:sed on enhancing the acco:nting Ior $!Es
and strengthening internal acco:nting and control systems.

The revelation oI acco:nting irreg:larities at Enron in the third q:arter oI 2001 ca:sed reg:lators
and the media to Ioc:s extensive attention on Andersen. The magnit:de oI the alleged
acco:nting errors, combined with Andersen's role as Enron's a:ditor and the widespread media
attention, provide a seemingly powerI:l setting to explore the impact oI a:ditor rep:tation on
client market prices aro:nd an a:dit Iail:re. C! investigates the share price reaction oI
Andersen's clients to vario:s inIormation events that co:ld lead investors to revise their belieIs
regarding Andersen's rep:tation
) Wos Fnron bovinq proper corporote qovernonce in ploce?
lf not precisely wos lockinq
No they did not have proper corporate governance in place.
O They got involved in :nethical ways oI doing b:siness which lead to their downIall
O There were acco:nting irreg:larities occ:rring
O They did not have a clear and transparent system in place
O The top management was not tr:thI:l to the company itselI
Also as s:ggested by $EC
O They sho:ld have imposed control wherever necessary to check the internal department
O They sho:ld have had diIIerent committees like
4 Nomination committee
4 A:dit committee
4 #em:neration committee
obit kumar
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