Inside the WorldCom Scam, Essay Example

The episode titled, “Inside the WorldCom Scam” on the programme, American Greed on CNBC talks about WorldCom, once one of the largest telecommunication conglomerations in the world. The programme documents a  white collar crime that was committed in the United States.  It investigates one of the most notorious cases of corporate fraud to ever happen in the US and the whole world in general. It documents how the rise and fall of the largest bankruptcy case in US history. The company filed for chapter 11 bankruptcy in 2002 and emerged from it 2004, having accumulated a debt of nearly $6 billion dollars.  Most of the corporation’s creditors are yet to be paid with a majority waiting for years to receive money owed to them. The story of WorldCom is one perfect example of corporate satisfying their greed through complex and illegal financial maneuvers.

The focus of the episode is on Benard Ebbers, WorldCom’s chief executive officer who transformed the company from a small telephone company into a colossal telecommunications giant.  The crime committed by Ebbers was accounting fraud whereby the shareholders were defrauded through illegal accounting practices. The CEO with assistance from some other top managers who included Scott Sullivan, the chief financial officer, David Myers, the controller and Budford Yates who was in charge of general accounting.  “They fraudulently used accounting methods to hide diminishing returns by projecting a false image of financial growth and profitability to sustain the share prices of its stock.” The methods they used to commit the crimes included providing less information on the “line costs.” These are costs related to interconnection expenses with other telecom companies. World Com carried out the underreporting by capitalizing these costs on the balance sheet instead of ensuring that they were expensed in the right manner.” Another way through which they committed fraud was through inflating revenues through use of non-existent accounting entries from “corporate unallocated revenue accounts.” Although it can be said that individuals were responsible for the above activities, blame has also been directed to the firm’s structure and culture which played a big role to the length of time the fraud was committed before it was detected.  The inefficient corporate governance at place and lack of scrutiny by investors for more transparency only encouraged the fraudulent activities to go on unabated.

The CFO was held responsible for the accounting mess that had occurred at the firm and was arrested on charges of fraud and misrepresentation. The company’s auditors, Arthur Andersen were also held culpable for letting the scandal happen under their watch. The CEO’s personal propensity for taking risks was a major contributor to the significant rise of the corporation, but it was also cited as the major cause of collapse.  Ebbers ran the corporation into a $40 billion debt in his zeal to fund more acquisitions.  Additionally, he transferred the same strategy to his own personal investments by taking out many loans using his stocks in the corporation as a security. Ultimately, the decisions he made regarding his own personal investments ended up affecting crucial business decisions regarding the company because in the end he was left with huge amount of debt amounting to $ 500 million dollars, which was approved by the company’s board of directors. The board of directors had also been accused of not doing enough to nip the scandal in the bud.

Illegal activities at WorldCom were first exposed by the corporation’s own internal audit department that exposed an estimated $ 4 billion that had been fraudulently misappropriated. The audit department quickly informed the board of directors who acted quickly and fired the CEO, while Myers resigned. This was followed by a Securities and Exchange Commission (SEC) instituted investigation into the financial affairs of the corporation. The revelations the illegal activities were led by the former vice-president of internal auditing, Cynthia Cooper who decided to investigate inconsistencies the corporation’s accounting entries.  Her concerns led her to report the anomalies to the corporation’s board of directors in June 2002 where she told that suspect accounting practices were being used to perpetuate illegal activities.

Bernard Ebbers the CEO was sentenced for 25 years in prison after being found guilty of all the charges leveled against him. “The charges included fraud, conspiracy and filing false documents with regulators.” The former chief of finance, Scott Sullivan entered a guilty plea on conspiracy to commit fraud related to securities, and filing false statements.  Others who pleaded guilty to the charges include Budford Yates the former director of accounting, Betty Vinson and Troy Normand, former managers in the accounting department.

The scandal that rocked WorldCom affected many groups with employees, shareholders and bankers bearing the brunt of it all. The aftermath of the scandal led to 17,000 employees being laid off and plummeting in the share prices of the company’s stock. WorldCom stocks tumbled from more than $60 a share to less $0.20, bringing with it massive losses to its shareholders.  Other groups that were adversely affected by the collapse of the company include long distance customers, and internet users.

Reference:

CNBC. (2009, November 4) Inside the WorldCom scam, case 1[Video file] Retrieved from http://www.cnbc.com/id/23237211