Worldcom Scandal Essay
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The purpose of this report is to look back at one of the biggest US corporate scandals: WorldCom. WorldCom fall down was the biggest bankruptcy in US corporate history: 20,000 employees lost their jobs, shareholders lost about 180billion dollars. How did all this happen?
Unethical practices: 1. Change in accounting policy: there was a change in the accounting policy in 2000 to support an additional accrual release. GAAP does not permit the use of accruals established through charges for one type of expense to be used to offset another expense.
2. Capitalization of line costs instead of expensing them 3. Inflated revenues with bogus accounting entries from corporate “unallocated revenue accounts” 4. Stock allocation
Poor internal controls: 1. Major failure of WorldCom’s corporate governance: the board of directors were unaware of the fraud and the improper accounting practices used. 2. The Board and its committees did not function in a way that would notice red flags: the outside directors had no or little involvement in the company’s business other than through attendance at Board meetings.
3. The Audit Committee needed an understanding of the company to be effective: the members did not have sufficient understanding of the internal practices and the culture which led to devoting little time to their role, and meeting as little as three to five hours a year. Dysfunctional behavior of corporate managers:
1. Bernie Ebbers created a corporate environment, permitted by the Board, in which the pressure to get the numbers was high, the control departments were weak, the senior management’s word was final and not to be challenged. 2. Internal audit was reported directly to Scott Sullivan (CFO and also convicted for accounting fraud) and therefore claims for wrongdoing were not pursued by Sullivan. 3. WorldCom’s controller David Myers, VP of Financial reporting Stephanie Scott, and Director of Financial Reporting Mark Willson controlled Arthur Anderson’s (external auditor) access to information and withheld information from him. The report of WorldCom’s investigation contains details and excessive information on all investigations following this corporate scandal. Many other examples which led to WorldCom’s bankruptcy can be listed.
Conclusion: A company to have an effective internal control there must be consistency and integration among five major components: 1. Control environment- the people and their integrity, ethical values and competence. 2. Risk and its assessment- the risks the company is facing must be identified and assessed before controls are developed. 3. Control activities- policies and procedures to be established and executed. 4. Communication and information- the company to manage and control its operations should communicate all information available. 5. Monitor- the whole process should be monitored and if modifications are necessary they should be performed aggressively.