ACCOUNTING FOR MANAGEMENT

WORLDCOM SCAM

Group members:
Zabihullah mohammadi
Diksha gautam
Mona Garg
Kanupriya Thakur
Hargurvir Singh
Bakhshand
Sourabh

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Contents
Introduction ................................................................................................ 3
Definition of Fraud ..................................................................................... 4
Fraud Triangle ............................................................................................ 5
Audit Committee ....................................................................................... 8
Company Culture ..................................................................................... 10
Corporate Governance .............................................................................. 19
Effects on Internal Environment ............................................................... 19
Effects on External Environment .............................................................. 21
Conclusion ................................................................................................. 23

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Introduction
WorldCom was a provider of long distance phone services to businesses and
residents. It started as a small company known as Long Distance Discount Services
(“LDDS”) that grew to become the third largest telecommunications company in
the United States due to the management of Chief Executive Officer (“CEO”)
Bernie Ebbers. It consisted of an employee base of 85,000 workers at its peak with
a presence in more than 65 countries. LDDS started in 1983. In 1985, 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 characterized by sixty acquisitions of other telecomm
businesses in less than a decade. In 1999, Ebbers was one of the richest Americans
with a $1.4 billion net worth.
But this company is not known for its growth and service more over it is known for
a massive accounting scandal that led to the company filing for bankruptcy
protection in 2002. WorldCom executives effectively fudged the company's
accounting numbers, inflating the company's assets by around $12.8 billion dollars.
The swift bankruptcy that followed led to massive losses not only for investors but
also for retailers and employees. The WorldCom scandal is regarded as one of the
worst corporate crimes in history, and several former executives involved in the
fraud were held responsible for their involvement. WorldCom inflated assets by as
much as $11-12.8 billion, leading to 30,000 lost jobs and $180billion in losses for
investors.
Former CEO of WorldCom Bernie Ebbers was the main culprit and he did it by
capitalizing inflated revenues with fake accounting entries and he is sentenced to
25 years for fraud, conspiracy and filing false documents with regulators.
Former CFO of WorldCom, Scott Sullivan received a five-year jail sentence
after pleading guilty and testifying against Ebbers.
David Myers, former director of General Accounting of WorldCom was
sentenced to one year in prison after the fraud incident.
Cynthia Cooper formerly served as the Vice President of Internal Audit
at WorldCom. She and her team were the first people who uncovered the major
fraud at WorldCom.
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FRAUD

Types of Fraud:
When inaccuracy of accounting records occurs, there are two possible reasons
for the discrepancy: error or fraud. An error is unintentional and often occurs
due to computer malfunction or human error, such as carelessness or lack of
knowledge. In contrast, fraud is intentionally committed in order to render some
gain for the perpetrator. The two means through which fraud is committed
include the misappropriation of assets and the misrepresentation of financial
statements.

Misappropriation of Assets

Misappropriation of assets occurs when an employee steals company assets,

whether those assets are of monetary or physical nature. Physical assets of the
company include everything from office supplies and office furniture to expensive
items in inventory, such as cars or large machinery. With lack of supervision or
security, employees could take inventory right out of facility. However,
misappropriation of physical assets includes not only taking items, but also the
unauthorized use of company assets. An employee driving a company car for
personal use would be an example of this.
Monetary assets susceptible to fraud typically include cash or cash equivalents
because these items are highly liquid and often easily accessible. With poor
internal controls, a company employee could steal checks and cash them for
themselves. Another example of fraud includes causing the company to pay for
goods or services that were not actually received or utilized by the company.

Misrepresentation of Financial Statements

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Misrepresentation of financial statements, often referred to as “cooking the books”,
occurs when the financial statements are intentionally misstated in order to make
financial position of the company look better than it actually is. This often involves
increasing reported revenues and/or decreasing reported expenses. It could also
involve misrepresenting balance sheet accounts in order to make ratios, such as the
current or debt to enquiry ratios, look more favourable. Reporting amounts
different from what would have been reported under GAAP is also considered a
misrepresentation of financial statements.

Fraud Triangle
In fraud triangle three conditions exist in the occurrence of fraud:
pressure, opportunity, and rationalization. auditors focus more on the
elimination of opportunity by ensuring strong internal controls, however,
they often fail to focus on the motivation or rationalization of the
offender .
Pressure :-Pressure is a person’s motivation to commit fraud.
Financial, Emotional, and Lifestyle pressures are common types of
pressure that exist for offenders. In WorldCom’s case, financial pressure
existed for top management to meet the expectations of analysts at Wall
Street. With the fall in the economic environment, the pressure was
intensified. During the month of September 2000, after reviewing
reports, Sullivan advised Ebbers that WorldCom’s operating and
financial results had worsened and that analysts‟ expectations for the
quarter would not be met. He further advised Ebbers to issue an
“earnings warning” to alert the public about the troubling situation at
WorldCom. When Ebbers firmly refused, they both agreed to take steps
to conceal the true nature of WorldCom’s financial statements.If the
culture at WorldCom had encouraged ethical decisions and integrity,
Sullivan could have been the hero by directly informing the Board about
the situation and saving billions in shareholder investments that were
eventually lost. Sullivan’s loyalty to Ebbers contributed as a pressure to
initiate the fraudulent activity. Ebbers was upheld in society as a honest
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man who was relied on by the general public, analysts, and investors to
provide “guidance” about investment decisions in WorldCom’s
performance. Hence, he felt the pressure to continue to contribute as the
figure everyone looked upon. Ebbers’s extravagant lifestyle created
pressure as he made large purchases with the help of loans that used
WorldCom stock as security. If Ebbers had listened to Sullivan and
announced the “earnings warning”, the stock price would have collapsed
and he would have been fully responsible for his loans. Some form of
emotional pressure existed such as greed that contributed to that
extravagant lifestyle for both Ebbers and Sullivan. Sullivan was building
a mansion in Florida at the time.So it is very important to know when to
step aside.

Opportunity: - Opportunity is the condition or situation that allows

a person or an organization to “commit the fraud, conceal the fraud, and
convert the theft or misrepresentation to personal gain”. The situation at
WorldCom that created the opportunity to commit the fraud was the
company’s control structure: the control environment, the accounting
system, and the control procedures. Unfortunately, WorldCom’s top
management failed to create a proper work environment. If top
management had taken the action to create a clear culture that
encouraged ethical behavior and properly modeled it to the employees,
perhaps Sullivan would have given Ebbers a straight no, upon the idea of
making up the numbers and the fraud would not have occurred. A proper
and effective accounting system would provide an audit record.
essentially a paper reccord that would make it easier to detect the fraud.
when WorldCom was in the process of obtaining multiple acquisitions at
a fairly quick rate, there was little time to integrate the systems properly
and the manipulation of numbers could go undetected thereby,
increasing Sullivan’s opportunity to commit the fraud and conceal it for
longer than it would take an effective accounting system to detect it.
Lastly, the control activities or procedures at WorldCom were not good
as there was no system of authorizations at headquarters. Sullivan was
able to get managers in the General Accounting department to make the

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journal entries for him without any documentation, even though the
entries were valued at millions. In addition to commit and conceal a
fraud, opportunity allows the offender to convert the misrepresentation
into personal gain. In the case of WorldCom, the personal gain was
limited. However, during the fraud period top management did receive
large bonuses and Ebbers was able to keep the stock price up enough to
satisfy his extravagant purchases and Sullivan was able to fund his
mansion. In the end, all personal fortunes were lost. The internal audit
department did not have full access to the financial statements. Morse
requested Cooper to ask Sullivan for full access.

Rationalization:- The final element of the fraud triangle is

rationalization: a form of justification in the mind of the offender of their
illegal behavior. Most perpetrators, as in the case of WorldCom, are
first-time offenders with no criminal background that allows them to use
rationalization to hide their dishonesty. Due to the economic conditions
that existed at the time of the fraud, the managers who made the journal
entries presumed the misstatement to be a one-time act. It is possible that
Sullivan also felt that the economy would turn around and all the 36
fraudulent misrepresentation would be equalized by the profits of the
next quarter. The choice for Sullivan and Ebbers alike was either their
integrity or their personal reputations. Unfortunate for them, they both
chose their personal reputations. An important note here is that because
the crimes committed were not violent, the perpetrators did not
understand the consequences of their crimes. If one commits murder, it is
easier for the murderer to see he has done wrong by taking the life of
another human being. However, by committing a fraudulent act, the
perpetrator believes he is not hurting anyone even though most investors
will later have their life savings and college funds evaporate.
Research shows that those “who commit fraud usually mirror the public
in education, age, religion, marriage” Furthermore, they enjoy more
“optimism, self-esteem, self-sufficiency, achievement, motivation, and
family harmony than other property offenders.

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Therefore, it is sometimes harder to point the finger on a well respected
and trustworthy figure of society. Perhaps if during fraud education
training at a company the employees are told and shown that the
consequences of fraud can be as devastating as or even worse than that
of a violent crime, the perpetrators would be more hesitant of
committing fraud and consider themselves different and apart from the
regular population as opposed to being a part of it.

Audit Committee WorldCom Scandal

As expected following an accounting fraud of this magnitude, one of the most
frequently asked questions has been: why didn’t WorldCom’s independent,
external auditor, Arthur Andersen, discover the accounting fraud.
There were apparent flaws in Andersen’s audit approach, limiting the likelihood it
would detect the accounting irregularities. Andersen limited its testing of account
balances in favor of relying on the adequacy of WorldCom’s control environment.
Yet it did not adequately test that control environment, overlooking serious
deficiencies in documentation and controls that were in fact exploited in
WorldCom’s fraud. Moreover, Andersen appears to have missed several
opportunities that might have led to the discovery of the capitalization of line costs,
management’s misuse of accruals, and the improper recognition of revenue items.
For their part, WorldCom personnel maintained inappropriately tight control over
information that Andersen required altered documents with the apparent purpose of
concealing items that might have raised questions, and were otherwise not
forthcoming. Andersen, knowing it was receiving less than full cooperation, failed
to bring this to the attention of WorldCom’s Audit Committee.
Though there were no evidences but reports suggest that Andersen personnel knew
about the capitalization of line costs. After KPMG LLP replaced Andersen as
WorldCom’s external auditor, both Sullivan and Myers told KPMG’s engagement
partner that the Company had never told Andersen about these entries.
Independent auditors are intended to perform a vital service to companies and
investors. The auditors are supposed to provide a disinterested and objective view
of the financial statements of a company. Indeed, financial statements examined by
independent auditors are a cornerstone of our system for disclosure of information
to investors. The public should be able to rely on the integrity of the independent

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audit and the auditor’s report that the financial statements fairly present, in all
material respects, the financial condition of the company and the result of its
operations in conformity with generally accepted accounting principles. The
company’s management is responsible for the preparation and accuracy of its
financial statements, and maintaining effective internal controls over the financial
reporting process. Management must provide the independent auditors with access
to all financial records and related personnel the auditors deem necessary to carry
out their work, which a part were kept dark from Anderson.

Internal Auditors
WorldCom’s audit committee failed to meet with the Internal Auditors of the
company, who had the duty to provide the Audit Committee with an independent
and objective view on how to improve and add value to WorldCom’s operations.
The internal auditors were provided limited access to the income statements and
balanced sheets with only partial picture of the company’s financial situation that
prohibited them from assessing the finance of the company.

External Auditor
Andersen and WorldCom developed a close, long-term business relationship.
Andersen served as WorldCom’s independent auditor from at least 1990 through
April 2002 and had a professional relationship with the Company for more than
twenty years. Because of its experience with WorldCom, Andersen told the Audit
Committee in its Year 2000 Audit Proposal that it understood the business issues
and risks associated with WorldCom’s operations, and that it considered itself “a
committed member of WorldCom’s team.”
In the same proposal, Andersen also stated that it considered WorldCom “a
flagship client and a ‘Crown jewel’” of its firm. WorldCom was one of the leaders
in the telecommunications industry, and Andersen appeared to enjoy the prestige
of being WorldCom’s auditor. In an internal document, it described WorldCom as
a “highly coveted client,” and stated in its Year 2000 Audit Proposal that none of
Andersen’s clients was as important as WorldCom to its success and reputation in
the telecommunications industry. Indeed, in a presentation to the Audit Committee
on May 20, 1999, Andersen stated that it viewed its relationship with WorldCom
as a “long-term partnership,” in which Andersen would help WorldCom improve
its business operations and grow in the future. During the same presentation,
Andersen told the Audit Committee that it incurred more auditing costs than it
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billed WorldCom, and that it considered the unbilled costs its “continuing
investment” in the Company. Andersen’s work papers documented that its internal
targets for audit fees were not met in WorldCom’s case, but an Andersen senior
officer nevertheless approved the continuation of the engagement.

Flaws in Anderson’s Audit Approach

 Andersen misjudged the risk that WorldCom‘s management would engage
in fraud. It consistently found that the risk of fraud was no greater than
“moderate” (and very often minimal) and, therefore, did not devise auditing
procedures to focus on the possibility that there was fraud. Andersen
maintained this view even though it had rated WorldCom a “maximum risk”
client—an assessment Andersen never disclosed to the Audit Committee—
and had given management less than favorable ratings in a few areas (such
as accounting and disclosure practices, behavior toward Andersen‘s work,
and policies to prevent and detect fraud) in internal documents without
apparently adjusting its auditing procedures to mitigate these risks.
 Andersen relied too heavily on senior management’s perceived integrity, and
failed to corroborate the information that management provided. The most
glaring and significant example of this reliance was Andersen’s request to
management on a quarterly and annual basis for a list of “significant
eliminating and top-side entries’’.
 Andersen did not conduct substantive tests in the areas where significant
accounting irregularities were found.

Company Culture

Company culture is the values, behaviors, and shared vision that contribute to the
environment of an organization. An engaging, enjoyable company culture can
attract talent, and can also inspire employees to perform at their best. Additionally,
a company culture clearly outlines your workplace's values, and ultimately drives
your entire company under a common vision.
In a Deloitte study, 87 percent of organizations cite culture and engagement as one
of their top challenges. If you feel your culture can be improved but aren't sure

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where to begin, keep reading to learn about the different types of company
cultures, and get ideas on how you might improve your own culture.

Types of company culture

Team-first corporate culture
Elite corporate culture
Hierarchy/traditional corporate culture
Horizontal corporate culture
Clan culture
1. Team-first Corporate Culture
As the name implies, a team-first corporate culture is one in which team bonding
and cross-department collaboration is considered top priority. In a team-first
corporate culture, you're likely to find both formal and informal events planned to
encourage strong employee relationships, including regular team outings or after-
work drinks.

Additionally, a team-first corporate culture typically offers flexibility and a level of

autonomy to ensure employee happiness. For instance, Netflix provides its
employees with a full year of unlimited family leave, which allows employees the
opportunity to decide what works best for them.

Netflix also encourages independent decision-making, and a culture in which

information is shared openly. These aspects of the culture are inherently team-first,
as they emphasize the importance of collaborating and communicating with team
members to ensure the company stays on track to hit goals without sacrificing an
employee's individual needs.

2. Elite Corporate Culture

You'll want to consider companies like Google or Facebook when you think of an
elite corporate culture, which is a culture in which innovation and forward-thinking
are not only encouraged, but expected. An elite corporate culture hires only the
best, and values fast growth -- ultimately, the employees of an elite corporate
culture aim to become the trailblazers in their industry.

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For instance, Gain sight, a SaaS company, demonstrates its culture's emphasis on
innovation on its About Us page, where they state: "To change the world of
business, you've got to have great captains". Additionally, one of their five values
is "Stay thirsty: we believe in a totally internally-driven strive for greatness."

You might have an elite corporate culture if your company encourages each
employee to think outside the box, and push the boundaries of the status quo on a
daily basis.

3. Hierarchy/Traditional Corporate Culture

In a hierarchical or traditional corporate culture, you'll find the bottom-line is

always highest priority -- meaning a company with a traditional corporate culture
likely makes risk-averse and data-driven decisions, and typically doesn't take too
many risks. A traditional corporate culture likely enforces a dress code, and has a
clearly defined hierarchy. Additionally, a more traditional culture has an
established practice, which makes it difficult to implement new technology.

Bureaucratic organizations like the Department of Motor Vehicles, or Burger King,

are good examples of a hierarchy culture. These organizations follow corporate
procedures to ensure consistency and results.

4. Horizontal Corporate Culture

A horizontal corporate culture is typically more popular with small start-ups -- as

the name implies, it's a culture in which everyone pitches in and collaboration is
critical. Since the company is typically young, a horizontal corporate culture is
flexible in nature and encourages employees to use market research to refine their
strategy.

For instance, take a look at some of these employees' reviews of Acorns, a

software company with digital investment products -- "[People in leadership
positions] are great! I always received help from them when needed" and "Every
person in the company is engaged and you'll get help from any person that you
reach out to".
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These are the types of reviews you'd expect to see for a horizontal culture.

5. Clan Culture

Last in our list, clan culture refers to a company with a "family-like" atmosphere.
Typically popular with smaller companies and startups, clan culture suggests a
high level of employee engagement and collaboration, and a strong emphasis
placed on teamwork. Additionally, with clan culture there's typically fewer levels
of management between employees and leadership -- which means communication
tends to be more informal and candid.

For instance, on Smile Brand's Glassdoor review, you'll see one employee wrote,
"I've worked for Smile Brands for close to 12 years. I enjoy the family atmosphere
and collective focus on supporting the practices and optimal patient care."

Company culture ideas

Offer impressive workplace benefits, like an on-site gym or unlimited vacation.

Focus on diversity initiatives.
Plan team-building activities.
Give back to the community.
Take action to help your employees' health and wellness.
Create a company culture manifesto or slide deck.
Collect employee feedback.
1. Offer impressive workplace benefits, like an on-site gym or unlimited vacation.

Typically, one of the first aspects you'll hear about when you discuss workplace
culture is the benefits -- but free beer isn't enough to implement a truly impressive
company culture. Instead, you'll want to ensure the benefits you offer exist to
increase your employee's happiness, and align well with your values. An on-site
gym, for instance, shows your company's commitment to health and wellness.
Alternatively, unlimited vacation makes sense if your company values autonomy.

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If you're unsure which benefits are appropriate for your company culture, take a
look at The Comprehensive List of Employee Benefits.

2. Focus on diversity initiatives.

A strong office culture can't exist without focusing on diversity. For instance, a
survey by Glassdoor found 67% of people consider diversity an important factor
when deciding where to work -- to attract top talent, then, it's imperative you
incorporate diversity into the workplace.

Additionally, diversity can foster innovation, and diverse teams perform better. To
learn more about the benefits of diversity in the workplace, check out 5 Awesome
Benefits of Diversity at Work.

3. Plan team-building activities.

To create a fun and engaging company culture, it's critical you implement both
formal and informal events to cultivate stronger relationships among members of
your organization. You might consider monthly team outings, or informal happy
hour drinks after a campaign kickoff.

To ensure everyone feels included in the outings, vary the types of experiences you
have with your fellow team members -- for instance, one month you might commit
to a charity event, and another month you might create an office fitness challenge.

Ultimately, a strong office culture can only exist once employees begin feeling
more comfortable with one another. Additionally, it's important your company
offer opportunities for employees to engage with coworkers from different
departments, for better company alignment.

4. Give back to the community.

To improve employee morale and give employees another reason to feel proud to
work for your organization, consider offering employees the opportunity to
volunteer for a local charity. Charity events enables employees to bond with one
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another, and can also ensure your employees see first-hand how your company's
values play out in real life.

For instance, ExxonMobil awards a $500 grant to a non-profit once a team of five
or more employees volunteer for a combined total of at least 20 hours -- this allows
employees to focus on teamwork and strengthen employee relationships, while
giving back to the community.

5. Take action to help your employees' health and wellness.

Having healthy employees has proven to result in better productivity, lower

healthcare costs, and less turnover rates -- all critical components to a good
workplace culture. Additionally, healthy employees are happier, which will likely
lead to a more engaged workforce.

There are plenty of opportunities, varying in cost, to create a stronger workplace

wellness program. You might invest in standing desks, create lunchtime yoga
sessions, provide healthy snacks, or offer personalized nutrition counseling.
Alternatively, you might simply offer employees more flexible hours, so they can
arrive at work early and leave at 4 p.m. to catch a cycling class, or arrive late after
a morning meditation session.

Essentially, any steps you take to help employees feel better will pay-off in the
long run. And, ultimately, you'll create a culture in which health is considered a top
priority -- which is certainly a place I'd like to work, wouldn't you?

6. Create a company culture manifesto.

A few years ago, HubSpot founder Dharmesh Shah created this Culture Code slide
deck, with the purpose of answering the following questions for viewers -- "What
do we believe? What makes us tick?"

A powerful company culture manifesto or document is critical for attracting top

talent, and can be used as a resource for recruiters and HR. Additionally, a
manifesto enables you to clearly outline what your culture is, as well as what you
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want it to be -- essentially, it can work as a road map, guiding employees when
making decisions regarding behaviors and values.

For instance, HubSpot's slide deck states one simple rule: "Use good judgment."
This is a memorable statement internal employees can use when decision-making.

7. Collect employee feedback.

You'll never fully know whether your company has a strong and compelling
culture if you don't regularly collect employee feedback. By asking your
employees how they feel, you'll be better equipped to recognize strengths in your
current culture, as well as areas for improvement. For instance, maybe you'll find
employees are unhappy with the lack of training programs your company offers.

This information can help you create a more targeted and unique workplace culture
down the road -- one that focuses less on free beer, and more on long-term
employee happiness.

If you need further assistance developing your company's culture, consider

checking out Delivering Happiness, an organization that offers workshops and
online resources to help companies improve their workplace culture.

Words to describe company culture.

corporate governance
Corporate governance is the combination of rules, processes or laws by which
businesses are operated, regulated or controlled.

Margaret Rouse WhatIs.com

11 Apr 2019
Contributor(s): Sarah Lewis

Corporate governance is the combination of rules, processes or laws by which

businesses are operated, regulated or controlled. The term encompasses the internal
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and external factors that affect the interests of a company’s stakeholders, including
shareholders, customers, suppliers, government regulators management. The board
of directors is responsible for creating the framework for corporate governance that
best aligns business conduct with objectives.

Specific processes that can be outlined in corporate governance include action

plans, performance measurement, disclosure practices, executive compensation
decisions, dividend policies, procedures for reconciling conflicts of interest and
explicit or implicit contracts between the company and stakeholders.

An example of good corporate governance is a well-defined and enforced structure

that works for the benefit of everyone concerned by ensuring that the enterprise
adheres to accepted ethical standards, best practices formal laws. Alternatively, bad
corporate governance is seen as poorly-structured, ambiguous and noncompliant,
which could damage the image or financial health of a business.

Principles of corporate governance

While corporate governance structure may vary, most organizations incorporate

the following key elements:

All shareholders should be treated equally and fairly. Part of this is making sure
shareholders are aware of their rights and how to exercise them.
Legal, contractual and social obligations to non-shareholder stakeholders must be
upheld. This includes always communicating pertinent information to employees,
investors, vendors members of the community.
The board of directors must maintain a commitment to ensure accountability,
fairness, diversity transparency within corporate governance. Board members must
also possess the adequate skills necessary to review management practices.
Organizations should define a code of conduct for board members and executives,
only appointing new individuals if they meet that standard.
All corporate governance policies and procedures should be transparent or
disclosed to relevant stakeholders.
Conflict management in corporate governance
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One purpose of corporate governance is to implement a checks and balances
system that minimizes conflicts of interest. Conflicts typically arise when two
involved parties have opposing opinions on the way the business should be
conducted. Since a board of directors is typically a mix of internally and externally
involved members, corporate governance is a non-biased way to approach conflict.

Conflicts could occur when executives disagree with shareholders. For example,
the shareholders will typically want to solely pursue interests that generate profit
while the chief executive officer might want to invest in better employee
engagement efforts. Another type of conflict could arise if multiple shareholders
disagree with each other. It would be the role of corporate governance to define
how these matters are settled.

Regulation of corporate governance

Corporate governance has received increased attention because of high-profile

scandals involving abuse of corporate power or alleged criminal activity by
corporate officers. Therefore, laws and regulations have been passed to address the
components of corporate governance.

Sarbanes-Oxley Act: This act was passed after it was found that high-profile
companies and their executives were committing fraud. As a result, was placed on
corporate governance as a way to restore faith in public companies.
Gramm-Leach-Bliley Act: This act regulated the ways that financial institutions
handled privation information, making it crucial for corporate governance to
include how to oversee financial organizations and stakeholders.
Basel II: This is a business standard that minimizes the financial effect of risky
operational decisions. The rights of shareholders are covered under this standard,
thus affecting corporate governance.

Continue Reading About corporate governance

CorpGov.net is devoted to helping shareholders oversee the operation of

corporations.
18
The International Corporate Governance Network is a forum for the exchange of
news and information, and for defining corporate governance standards throughout
the world.
The effect of SOX on corporate governance and IT operations
Use business continuity to boost your corporate governance process
Burden of data protection rests on firms and governments.

Affected
Effects on Internal Environment
After the fraud was announced to the public on June 25, 2002, new measures were
taken quickly to reform WorldCom and restore the public’s confidence in the
company. The first big step was the removal of top management. Ebbers resigned
earlier in the year due to the extravagant loans he had taken from the company,
Sullivan was fired, and Myers resigned. A new president was recruited. The new
COO, CFO, general counsel, and director of internal control had no previous
relations to WorldCom. The entire Board of Directors was replaced with a new
Board to guarantee independence and objectivity about management’s decision.
The finance and accounting department in Clinton, Mississippi, where the
fraudulent activities occurred, was shut down (Breeden, 2003). Hence, any hint
that a fraud had occurred at the company was removed.
While more than four hundred new finance and accounting personnel were hired,
17,000 of the existing 85,000 employees at WorldCom were let go. A new
independent auditor was 40

brought in to re-audit the financial statements for the fraudulent period. The
overstated assets were evaluated for impairment and the goodwill from the
previous acquisitions was written down. The use of stock options was also
abolished and restricted stock with full expensing value of equity grants was
implemented (Breeden, 2003). The stock price itself, which was at a high of $64.50
at its peak in 1999, fell to $0.83 by July 21, 2002, when the firm filed for Chapter
11 bankruptcy. A thorough review of the internal controls was initiated to

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strengthen the company’s internal controls. Lastly, a new ethics program was
implemented with training programs for employees to educate them on the manner
of their responsibility at the company and on the accounting issues that may signal
an irregularity (Breeden, 2003).
While the new implementation of controls depicts a firm action by WorldCom to
reinvent itself, it is unfortunate that these changes were exactly what WorldCom
needed to prevent the fraud in the first place. If in the pre-discovery period the
internal audit department in had been allowed to do its duties properly, it would
have discovered the irregularities. While Cooper’s department did present many of
the deficiencies in the system to the Board, none were considered a priority due to
Ebbers’s lack of interest in the department.
WorldCom reorganized itself by filing for a Chapter 11 bankruptcy instead of
Chapter 7 to show that it wanted to keep its business going and was not giving up
on providing its customers what they expected. It also changed its name to its
biggest acquisition, MCI, to differentiate itself from the fraudulent WorldCom. In
essence, the bankruptcy was characterized by the restructuring of WorldCom’s $41
billion in debt. Yet, the Chapter 11 reorganization allowed WorldCom to lower its
costs, giving it an unfair advantage over its law abiding 41

competitors. The bankruptcy did lower new WorldCom’s market share, which
allowed its competitors to survive, even though an artificial decline in prices
occurred (Sidak, 2003).
In the end, the new WorldCom was bought by Verizon in 2006 for $8 billion.
According to Morse (personal communication, October 22, 2010), Verizon was
able to acquire it for a very good price when compared to WorldCom’s large
infrastructure and a market cap that was at $220 billion at its peak.

Effects on External Environment

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The largest effect on the external environment was on the investors of WorldCom.
The New York State Common Retirement Fund is the second largest public
pension fund in the U.S. It invested the assets of the New York state and local
employees‟ retirement system and of the New York State and Local Police and
Fire retirement system. The pension fund lost over $300 million of its investments
in WorldCom. The HGK Asset Management, a registered investment advisor, also
purchased about $130 million of the debt securities offered by WorldCom on
behalf of union sponsored pension and benefit plan and lost it all (in re WorldCom,
Inc., 2003).
Institutional investors and creditors were perhaps the few that were for the most
part unaffected by the debacle due to the diversification of their investments.
Hence, even the world’s largest bankruptcy of the time was unable to shake their
investments.
In terms of the banks, brokers, and accountants that knowingly or unknowingly
aided the growth of the fraud, they were punished in five different ways: from the
losses they incurred due to loans extended to WorldCom, by the financial penalties
and settlements they had to agree to, by the class-action litigations, by losing
market value of their own stocks as a result of 42

association with WorldCom, and by the extensive additional costs that had to be
incurred to meet the additional legal and compliance measures imposed on them
(Smith & Walter, 2006).
Wall Street’s settlements with the SEC and, then Attorney General, Eliot Spitzer
amounted to $1.5 billion, including annual compliance costs of about $1 billion for
five years. Due to the settlements, research budgets fell by 40%, causing many
companies to be dropped from Wall Street’222s coverage, which was necessary to
“support investment by institutional investors” (Smith & Walter, 2006).
While it may appear that WorldCom‟s competitors benefited from its downfall, the
effect of the fraud on them was truly the opposite. Since WorldCom‟s competitors,
such as AT&T and Sprint, liked many others, believed that the financial statements
were true, the companies had to restructure themselves significantly to match
WorldCom‟s position. Former AT&T CEO, Mike Armstrong, stated that AT&T

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made “bad investment decisions” such as firing 20,000 employees and utilizing
other cost cutting actions to meet WorldCom‟s numbers. These draconian actions
led many to credit Armstrong as the one who broke the company (Sadka, 2006).
Former Sprint CEO, William Esrey, also stated that the pressure to compete in the
market and to meet WorldCom‟s false numbers led to an unreasonable expansion
of companies in addition to the “foolish investments” and unsustainable low prices
(Sidak, 2006). He noted that employees at Sprint had a hard time understanding
how it was that WorldCom was able to beat them and they were not able to
compete successfully. Sidak adds that while general learning from competitors is
healthy and can be socially beneficial, in the case of WorldCom, its competitors
were relying on false statements that caused them to become “socially destructive.”

Conclusion
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The causes, the characteristics, the consequences tell a story with a lesson.
The causes serve as red flags that the stakeholders and auditors of a company
should look for to prevent a fraud. If the circumstances within the company and in
its external environment suggest a situation different than what is represented in
the financial statements, suspicions should be raised. Especially, the external
auditor must increase the amount of persuasive evidence needed as well as increase
the tests performed required to give an objective opinion.
The characteristics serve as red flags for auditing the financial statements. If a
fraud has occurred in the company’s industry previously, the auditor should gather
as much information as possible about the previous fraud in terms of its journal
entries and other accounting tactics utilized and observe closely the fraud triangle
to see if similar pressures persist presently as they did in the previous fraud.
The consequences serve as red flags for the auditor as reminders that the objective
of the auditor is to provide an independent opinion on the company and retain the
public’s trust in him/her. If the auditor fails to do so, the consequences can be
disastrous and can lead to grueling circumstances for the company, its stake
holders, and the economic state of the country.
The lessons learned serve as reminders to not commit the same mistakes as were
previously committed.
Do not withhold from people what is rightly theirs and do not spread corruption.
This is all for the better wellbeing of society.

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