WORLDCOM CASE ANALYSIS

WorldCom Case Analysis

Fatma Jaber g00083167

Sultan b00078537

Najia g00085315

American University of Sharjah

ACC394: Forensic Accounting

Dr. Taisier Zoubi

.
WORLDCOM CASE ANALYSIS

Summary 3
WorldCom Case Analysis 4
About WorldCom 4
Major accounting issues in this case 5
a) Impact on Individuals, Internal Environment, and External Environment 5
b) Reasons and Motivations of Committing Fraud in WorldCom 7
Preventing Methods that could have been done by WorldCom’s Management 10
Lessons Learned for U.S. Government and Actions taken due to this case 11
References 13

Summary
WORLDCOM CASE ANALYSIS

The telecommunication industry witnessed a declining rate in the late 1900s, which

pressured the organizations to do better than before and boost their profit in order to maintain

their positions in the market and eventually meet Wall Street's expectations. WorldCom, a

telecommunications business, indeed fell for such pressures. Consequently, WorldCom's

management, board of directors, and accountants resulted in the development of a fraud scheme -

that aimed to deceive the public about the performance of the company to attract more investors.

Lessons can be drawn from analyzing what contributed to this scam, how it expanded, and what

are its consequences, the reasons, and motivations behind this scheme, and ways how to prevent

potential fraudsters from practicing such frauds and expanding them to cases as large as

WorldCom.
WORLDCOM CASE ANALYSIS

WorldCom Case Analysis

About WorldCom

WorldCom was created as the brainchild of Canadian businessman, Bernard ‘Bernie’

Ebbers in Mississippi, United States, as Long-Distance Discount Service, Inc. Founded in 1983,

WorldCom went on to become one of the largest long-distance providers in the country.

Subsequent to Ebbers’ appointment as the Chief Executive Officer, WorldCom strengthened its

market position through various mergers and acquisitions including William Telecommunication

Group Inc., MCI Communications Corp., CompuServe Corp., etc. The year 1999 became the

golden year for WorldCom when their shares peaked at more than $64 per share and they rode

the dotcom bubble in its entirety and enjoyed a market capitalization of $175 billion. This

success was amplified owing to their merger intentions with Sprint Corp., one of the largest

mobile network operators in the United States (“Chronology of Events at WorldCom,” 2005).

However, their downfall from thereon was unforeseeable to many who relished in the glory of

WorldCom’s success.

Following the dotcom bubble bust, in March 2002, WorldCom received a request from

the U.S. Securities and Exchanges Commission (SEC) to serve them information relating to

accounting procedures and loans to officers. Things went downhill from there very quickly as

WorldCom resorted to accounting fraud to inflate profitability during the bubble crash. Simple in

nature, the WorldCom accounting fraud entailed the inflation of net income and cash flow by

capitalizing expenses (recording expenses as investments). This led to profits being overstated by

$3.8 billion in 2001 when in fact the company was facing a net loss (Hayes, 2021). A month

later, in April 2002, Bernie Ebbers was removed from the position of CEO due to the SEC

investigation into his $400 million personal loans which was followed by the removal of
WORLDCOM CASE ANALYSIS

WorldCom’s CFO, Scott Sullivan. In July 2022, WorldCom filed for Chapter 11 making it the

largest bankruptcy in corporate history (“Chronology of Events at WorldCom,” 2005). The

following years saw the conviction of Sullivan and Ebbers for several counts of securities fraud,

conspiracy, and filing of false documents. WorldCom survived the scandal as a going concern

under one of their acquirees, MCI Communications Corp. In 2006, MCI was acquired and now

operates under the corporate portfolio of the American wireless network operator, Verizon

Communications (Hayes, 2021). The involvement of WorldCom, their auditor Arthur Anderson,

another of Anderson’s auditees, Enron in accounting and securities fraud demanded the creation

of the Sarbanes-Oxley Act of 2002 which regulated much of the securities and accounting

industry to date.

Major accounting issues in this case

a) Impact on Individuals, Internal Environment, and External Environment

A crucial factor to understand the consequences of WorldCom’s scandal is to fully

comprehend the meaning of fraud and knowledge of when it exists. Fraud is anything done to

manipulate a situation and benefit the doer. It exists when: a material false statement exists,

awareness that the statement is false when articulated, reliance on the false statement by the

victim, and damages caused due to the victims' reliance on false statements. Furthermore, the

consequences of events at WorldCom were immense and impacted a wide portion of people,

from employees to investors, competitors, and almost everyone living in the United States.

The former CEO, Bernard Ebbers cost the company over $3.8 billion in expenses,

including the loans that he acquired from the company. Although he was the main person to

blame, other managers and board of directors, auditors, and accountants had a role in organizing

this fraud scheme as well. Thus, they were all forced to leave WorldCom and be replaced by
WORLDCOM CASE ANALYSIS

more competent and ethical members. Moreover, 17,000 of 85,000 employees lost his/her jobs at

WorldCom including the company’s controller, COO, and CFO (Noguchi, 2002). New Auditors

were hired to reperform the audit of the company during 2001 and the first quarter of 2002, the

auditors hired were independent and objective. Due to the improving financial situation,

WorldCom was falsely portrayed and their continuous acquisition of new companies in a time

when all telecommunication companies were declining, this made them stand out and draw in a

huge portion of investors until the stock price reached $64 in 1999.

Figure 1: WorldCom share price

Ultimately, the scandal significantly affected the investors – costing them around $175 billion

(Kadlec, 2002). Consequences on the external environment include, banks suffering losses of

additional collateral charges on loans requested by the company, as well as costs of class action

litigations issued by banks or any other victim. WorldCom also impacted negatively on their

competitors, firstly by performing well and exceeding them in the market. Secondly, by forcing

its competitors to restructure in order to match the high performance of WorldCom. The

restructuring included cutting costs and firing over 300,000 employees.

WORLDCOM CASE ANALYSIS

b) Reasons and Motivations of Committing Fraud in WorldCom

The fraud triangle describes three components that can be used to explain why people are

more likely to perpetrate fraud in any business. These components include perceived

opportunity, pressure, and rationalization. Perceived opportunity is having circumstances that

would allow fraud to take place, this could be a result of weak internal controls, easy access to

the company’s confidential information, or unethical management. Pressure is the pressure an

individual undergoes to commit fraud, either as a result of financial burdens, desperation to attain

bonuses, promotions, or meeting management expectations. Rationalization is simply an

individual’s justification for committing fraud. In the case of WorldCom, the management from

the CEO, COO, CFO, and controller all had the opportunity of committing financial

misstatements since the internal control system and corporate governance were weak and they

had the access to all of the company’s documents and could falsify records (Abdullahi, 2015).

For instance, improperly recording $3.8 billion in capital expenditures. As for the accountants,

Betty Vinson and Troy Normand ended up committing this fraud due to the corrupt management

that asked them to falsify the records, weak internal control, and accounting system, easy access

to accounting records as they work in the accounting department, and are collaborating with the

management – so any document needed, can be found easily. Pressure placed on management

includes the pressure to meet Wall Street’s expectations, motivation to save the company from

its declining stocks and to keep WorldCom's reputation and high performance in the

telecommunication industry. As for Vinson and Normand, the management pressured them into

committing fraud by reducing expenses so WorldCom could match Wall Street Expectations.

Vinson at first refused, however, the financial pressure and his concerns about supporting his

family made him eventually do it. Another reason might include, Vinson and Normand, need to
WORLDCOM CASE ANALYSIS

meet their management’s expectations as “skilled” accountants. Rationalization here could

include the management justifying their intentions, to only maintain WorldCom’s high-

performance levels and increase its stock price to impress their shareholders. As for the

employees, their actions can be justified as only following management orders and doing what

they are asked to do as employees. Furthermore, CFO Sullivan convinced them that the company

will only survive this crisis with their help and that the transfers are not illegal. He also

mentioned that in case anything happens, he will take full responsibility for it – which directly

made the accountants justify the fraud committed.

The fraud diamond has an additional component which is capability. Capability refers to

having the ability to recognize a fraud opportunity, commit it, and being able to conceal it. Here,

the management found that it will be easy to conceal the act since they are egoistic, already

known for their good reputation, and hold the highest positions at the company. In addition to

that, the accountants were the ones to commit financial statement fraud. Thus, it is less likely for

it to be discovered. From the accountant's perspective, the capability factor was supported by the

weak internal system as well, as the fact that the management was corrupt and insisting on

committing this fraud (they had power on their side). The accountants also had the necessary

skills required to deal with stress and be able to conceal this activity.

Moving on to the fraud pentagon, it adds two additional factors to the components of the

fraud triangle, which are competence and arrogance. Competence is similar to capability, it refers

to a person’s ability to commit fraud. For the management, their high position allowed them to

commit fraud as they have direct control over the company’s operation and accounts. As for

employees, they used intelligence to their advantage, to commit and conceal fraudulent activities.

Secondly, Arrogance is a direct result of feeling power and egoism. According to the
WORLDCOM CASE ANALYSIS

management, they had power over everything in the company and believed that they could

ignore the internal controls, force employees into committing fraud, and feel that these policies

don’t apply to them because they know how to serve the company the best. On the other hand,

Vinson and Normand may have felt an attitude of superiority as if they are now above the law

since they’re in direct touch with the management. Arrogance caused both the management and

accountants to ignore the potential damages this act might bring to investors and other victims.

Figure 2: Differences theories used to explain reasons and motivations of fraud

The psychology of fraudsters further discusses the typical motivations of fraud

perpetrators. M.I.C.E stands for Money, Ideology, Coercion, and Ego. Money and ego can be

clearly observed in the case of WorldCom. As explained above, both sides ( the management and

accountants ) were greedy and wanted more profit. Adding to that, they were both egoistic and

believed that they are above the law and can ignore the internal controls and accounting policies.
WORLDCOM CASE ANALYSIS

As for ideology and coercion, ideology is mainly associated with tax fraud and not believing in

the payment of taxes – not a motivation for the fraud committed in this case. Coercion is when

individuals are forced into a fraud scheme, although both accountants felt guilty and wanted to

stop committing financial misstatements, they were eventually tempted by money, egoism, and

other factors. Consequently, they kept their job and continued to perform fraud at WorldCom.

Preventing Methods that could have been done by WorldCom’s Management

WorldCom could have taken multiple measures to avoid the accounting scandal in the

company that led to its downfall. Firstly, WorldCom management could have created an

effective strategy that would have helped them attain a favorable position against their

competitors in the industry and remain profitable. It was the lack of planning and the failure to

implement an effective strategy that led the management to alter the financial statements to show

a strong financial position.

Second, as the fraud triangle mentions, to commit fraud there must be perceived pressure

and opportunity. WorldCom could have taken measures to avoid providing these pressures and

opportunities by implementing strong internal control, creating, and maintaining an environment

where the risk of fraud is low, and opportunity is eliminated. They could create a company

culture of honesty, openness, and assistance. A positive environment could have been created

with a proper code of ethics that should have been followed by the company, where employees

were open, honest, and trained enough to identify and prevent or report fraudulent activities.

WorldCom management should have practiced and promoted a work environment that

emphasizes integrity and commitment to the company so that it is conveyed to the employees of

WorldCom which will then be embedded in their work culture.

WORLDCOM CASE ANALYSIS

Third, the board of directors should have been directly involved in the daily business of

WorldCom, to oversee and identify any fraudulent activities. The company's strategy, financial

statements, policies, and procedures should be approved by the board. Additionally, they should

also communicate with both internal and external auditors of WorldCom consistently.

Lastly, the Internal audit team should have been vigilant so that they could have detected

the fraud earlier and provided the top management with suggestions to improve the operations of

the company. They should have also ensured compliance with the laws and regulations of the

country they operated in. They should have also hired forensic accountants that possess skills

like technical competency, investigative proficiency, and the ability to think critically.

Lessons Learned for U.S. Government and Actions taken due to this case

WorldCom was one of the biggest accounting and bankruptcy scandals in the history of

the United States. While the excitement of new companies started crashing in the early 2000s

known as the Dot-com bubble, WorldCom was seemingly doing well. Their numbers and

seemingly good performance raised some suspicion among the SEC. When internal auditors

decided to investigate allegations made by whistleblowers, they uncovered billions in wrongful

expense entries. This made the SEC conduct its own investigation which led to uncovering of

more fraudulent activities like overstating assets (George, 2021). The WorldCom scandal had

many of these issues including intentional wrongful and fraudulent entries, collusions, weak

internal control, conflict of interests, and destruction of evidence when clear suspicious activities

were investigated by the SEC (Hayes, 2021).

In the aftermath, congress passed the Sarbanes-Oxley Act (SOX), a new law that holds

top management personally liable for a company’s financial statements' accuracy. The law
WORLDCOM CASE ANALYSIS

covers a variety of controls including auditor independence, conflict of interest and financial

disclosures, responsibilities of the company's board, penalties for white-collar crimes, and even

helped in allowing whistleblower employees to anonymously report suspicious company

activities. It holds requirements for the board of directors and management and remarks on the

destruction of evidence in relation to impeding an investigation as done in the WorldCom case

(George, 2021).

Additionally, the Public Company Accounting Oversight Board (PCAOB) was

established. It is a board created by the Sarbanes-Oxley Act to supervise the audits of public

companies and protect investors and public interests by making sure of the accuracy,

information, and independence of the audit reports (Norris, 2005). The rules and standards that

are stated by PCAOB are approved by the SEC. They set all the auditing standards, quality

control, ethical standards, and everything related to the preparation of audit reports and financial

statements. It is also noteworthy to mention that the U.S dollar started declining, the stock

market had a sudden drop, bank loan procedures became more strict, pension funds were

hammered, and an increasing level of worry and doubt was created in U.S. companies, its

managers, and board members(Kadlec, 2002). The downfall was a result of managers and board

directors who were arrogant and failed to fulfill their duties. In conclusion, the U.S. government

learned to have and implement proper controls and standards that must be followed by auditors,

companies, and top management in order to protect the economy and public interests. They did

so by introducing the Sarbanes-Oxley Act and the founding of the PCAOB due to the act.
WORLDCOM CASE ANALYSIS

References

Abdullahi, R., Mansor, N. & Nuhu, M. (2015). Fraud Triangle Theory and Fraud Diamond

Theory: Understanding The Convergent and Divergent for Future Research. European

Journal of Business Management, 7(28), 30-37.

BBC News. (2002, June 26). US Telecoms Giant Admits Huge Fraud. Retrieved October 24, 2

022, from http://news.bbc.co.uk/2/hi/business/2066731.stm.

George, B. (2021, August 11). Fraudulent accounting and the downfall of Worldcom. Audit &

Advisory Services. Retrieved from

https://www.sc.edu/about/offices_and_divisions/audit_and_advisory_services/about/

news/2021/worldcom_scandal.php

Hayes, A. (2021, October 3). The rise and fall of Worldcom: Story of a scandal. Investopedia.

Retrieved October 31, 2022, from https://www.investopedia.com/terms/w/worldcom.asp

Kadlec, D. (2002, July 8). Business WorldCon. Business. Retrieved October 25, 2022, from

http://content.time.com/time/classroom/glenfall2002/pdfs/Business.pdf

Norris, F. (2005, July 14). A crime so large it changed the law. The New York Times. Retrieved

from https://www.nytimes.com/2005/07/14/business/a-crime-so-large-it-changed-the-

law.html

Noguchi, Y. (2002). WorldCom Lays Off 17,000 Workers. The Washington Post. Retrieved

October 25, 2022, from

https://www.washingtonpost.com/archive/politics/2002/06/29/worldcom-lays-off-
17000workers/84538b65-80fb-4b8e-b6a9-de1030454eaf/
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The New York Times. (2005, March 15). Chronology of events at WorldCom. The New York

Times. Retrieved October 31, 2022, from

https://www.nytimes.com/2005/03/15/business/chronology-of-events-at-worldcom.html