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WorldCom Fraud WorldCo m took the telecom industry by storm when it began a frenzy of acquisitions in the 1990s. The low margins that the industry was accustomed to weren't enough for Bernie Ebbers, CEO of WorldCom. From 1995 until 2000, WorldCom purchased over sixty other telecom firms. In 1997 it bought MCI for $37 billion. WorldCom moved into Internet and data communications, handling 50 percent of all United States Internet traffic and 50 percent of all e-mails worldwide. By 2001, WorldCom owned one-third of all data cables in the United States. In addition, they were the second-largest long distance carrier in 1998 and 2002. How the Fraud Happened? So what happened? In 1999, revenue growth slowed and the stock price began falling. WorldCom's expenses as a percentage of its total revenue increased because the growth rate of its earnings dropped. This also meant WorldCom's earnings might not meet Wall Street analysts' expectations. In an effort to increase revenue, WorldCom reduced the amount of money it held in reserve (to cover liabilities for the companies it had acquired) by $2.8 billion and moved this money into the revenue line of its financial statements. That wasn't enough to boost the earnings that Ebbers wanted. In 2000, WorldCom began classifying operating expenses as long-term capital investments. Hiding these expenses in this way gave them another $3.85 billion. These newly classified assets were expenses that WorldCom paid to lease phone network lines from other companies to access their networks. They also added a journal entry for $500 million in computer expenses, but supporting documents for the expenses were never found. These changes turned WorldCom's losses into profits to the tune of $1.38 billion in 2001. It also made WorldCom's assets appear more valuable. How was it Discovered? After tips were sent to the internal audit team and accounting irregularities were spotted in MCI's books, the SEC requested that WorldCom provide more information. The SEC was suspicious because while WorldCom was making so much profit, AT&T (another telecom giant) was losing money. An internal audit turned up the billions WorldCom had announced as capital expenditures as well as the $500 million in
WorldCom filed for bankruptcy. Quality is determined by the financial markets. and lay observers would agree that CG is defined as the general set of customs. Corporate Governance: Introduction Corporate governance (CG) is one of the most talked about topics in business. by directing and controlling management activities with good business savvy. however. habits. business author Gabrielle O'Donovan defines corporate governance as an internal system encompassing policies. processes and people. Sullivan pleaded guilty and took the stand against Ebbers in exchange for a more lenient sentence of five years. which serve the needs of shareholders and other stakeholders. Sound corporate governance is reliant on external marketplace commitment and legislation. firms such as the MCI Inc. WorldCom's audit committee was asked for documents supporting capital expenditures. Where Are They Now? When it emerged from bankruptcy in 2004. A little over a month after the internal audit began. objectivity. today. There has been renewed interest in the corporate governance practices of modern corporations since 2001. In 2002. WorldCom was renamed MCI. Most academics. but it could not produce them. and economic efficiency. O'Donovan goes on to say that 'the perceived quality of a company's corporate governance can influence its share price as well as the cost of raising capital. is the question: what defines good corporate governance? It is clear that CG exists at a complex intersection of law. There was also another $2 billion in questionable entries.8 billion over the previous five quarters. Ebbers was found guilty on all counts in March 2005 and sentenced to 25 years in prison. and laws that determine to what end a firm should be run. regulations. WorldCom then admitted to inflating its profits by $3. Corporate Governance: Definition In his book A Board Culture of Corporate Governance . Former CEO Bernie Ebbers and former CFO Scott Sullivan were charged with fraud and violating securities laws. plus a healthy board culture which safeguards policies and processes. business professionals.undocumented computer expenses. A Google search revealed 513 news citations during a single week in June 2006. particularly due to the high-profile collapses of a number of large U. (formerly WorldCom) given in the beginning of the chapter and the famous Enron fraud. The controller admitted to the internal auditors that they weren't following accounting standards. indeed in society. federal government passed the Sarbanes-Oxley Act. the U. but is free on appeal. accountability and integrity. Much more fraught. legislation and other external market forces plus how policies and processes .S. intending to restore public confidence in corporate governance. morality.S.
A properly structured board capable of taking independent and objective decisions is in place at the helm of affairs 2. It integrates all the participants involved in a process. and offers companies the opportunity to differentiate from competitors through their board culture. it seeks to achieve the following objectives: 1. Broadly. The internal environment is quite a different matter.are implemented and how people are led. about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. too much of corporate governance debate has centred on legislative policy. to a large extent. outside the circle of control of any board. its objective is to generate an environment of trust and confidence amongst those having competing and conflicting interests. Objectives of Corporate Governance The aim of "Good Corporate Governance" is to ensure commitment of the board in managing the company in a transparent manner for maximizing long-term value of the company for its shareholders and all other partners. Further. The board has an effective machinery to take care and manage the concerns of stakeholders 5. The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. The board is balance as regards the representation of adequate number of nonexecutive and independent directors who will take care of their interests and well-being of all the stakeholders 3. The board keeps the shareholders informed of relevant developments impacting the company .' Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. Hence it harmonizes the need for a company to strike a balance at all times between the need to enhance shareholders' wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company. It is integral to the very existence of a company and strengthens investor's confidence by ensuring company's commitment to higher growth and profits. Corporate Governance is viewed as business ethics and a moral duty. which is economic. It is about commitment to values. to deter fraudulent activities and transparency policy which misleads executives to treat the symptoms and not the cause. The fundamental objective of corporate governance is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability. To date. The board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information 4. and at the same time social. External forces are.
It is also important to consult with funding bodies and key community contacts y assistance from a specialist facilitator (this can have great benefits. It is a very important concept in the management of organisations. risk management reviews and/or quality assurance manuals. Risk management: Risk management is a concept that has gained significant publicity in recent years. it is appropriate to combine strategic and vocational planning with the business planning process. business plans.6. 2. The board remains in effective control of the affairs of the company at all times The overall endeavour of the board should be to take the organisation forward so as to maximize long term value and shareholders' wealth. Features of Corporate Governance There are some key features of good governance that needs to be considered when assessing the governance of an organisation. Some points for good planning include: y the Board should establish the goals for the organisation. to provide the framework for planning y the plan should be owned by the organisation y active involvement of Board members and management is critical y consultation with key stakeholders should include employees and consumers. the plans should be regularly reviewed and updated. The Board should consider whether it has a clear risk management framework that covers the organisation s . strategies and actions for a period. The board effectively and regularly monitors the functioning of the management team 7. For most disability services. The important issue is to ensure the overall strategy setting and planning for the organisation is clearly documented and communicated. To allow for changing circumstances. policy and procedures manuals. Certain key features of good corporate governance are discussed below: 1. It also provides a means to monitor the organisation s performance. Strategy setting and planning: Planning is a critical element of good governance. but care must be taken to ensure that the role is kept to facilitation and that the plan does not become owned by the facilitator) The importance of good planning is that it helps the organisation clearly set the objectives. marketing plans. in conjunction with management. These features should be central to an organisation s corporate governance framework and should be included in governance related documentation which may include organisational plans.
staff. independence and resources: . Skills. management. identify who should consult on behalf of the organisation with each stakeholder. Whilst the Board does not have a direct responsibility for risk management it does have a responsibility to ensure that managers and staff of the organisation have an appropriate risk management framework in place to mitigate or reduce risks that have been identified. Consultation: Within a successful disability services organisation. maximises the benefits of the relationship. 3. rather than against them. local government. etc. establish what Board involvement in such consultation should occur with each stakeholder. Risk should be thought of in terms of what. Who are the organisation s stakeholders: They may include the funding agencies. assess its impact and take treatment actions to address and/or monitor risk. 5. There needs to be an ongoing process to identify risk. include events that should be communicated to stakeholders.operations. There should be a reporting process to the Board by management on the emergence of new risks and the treatment of those risks. This policy should: include a communication strategy. businesses you deal with. suppliers or businesses where consumers are placed. It enables the stakeholders to understand the organization s objectives and strategies and helps them to work with the organisation in achieving those objectives. and how. The policy should be clearly communicated and understood by the Board. consumers and members of the organisation. for example. Effective consultation helps to create an environment of mutual respect and trust. Roles and responsibilities: The organisation should develop documented policy describing the roles and responsibilities of the Board. Working with the stakeholders as far as practical. of individual Board members and of management. staff members. the community within which you operate. and identify the frequency and format of ongoing consultation and communication y y y y y 4. customers. You should have a policy on how you consult with stakeholders. consultation with key stakeholders is an essential feature of good governance. losses (or gains) may affect the organisation through a wide range of sources.
Conduct and ethics: The tone set by the Board member or management. finance. which covers the Board members.The Board should have the right mix of skills to manage the organisation s affairs. the current manager should be responsible for grooming other senior staff as potential successors. Succession planning: At some point in the future a successor will be required to continue the management of the organisation. it is very important that a code of conduct be established. It is also important to have a mix of people on the Board. has a major influence on the organisation s integrity. this sets a tone in the organisation that these attributes are valued. the nature of the performance measures and reporting should not be overly oppressive and onerous. As an individual Board member it is difficult to have the expertise across all these areas. these people should not be members or have a direct interest in the affairs of the organisation. the expectation of their contribution may be determined and a means of performance measurement established. If possible. . If achieving this mix of skills on the Board is difficult then the organization can consider accessing professional people to provide advice on certain matters. management and staff. The reason for this is to provide a balanced. production or service management. These skills should cover key functional areas such as: Business acumen/expertise. and guidance for interpreting the principles y y 7. If staff and consumers see the top level acting ethically and with integrity. From that. The code of conduct should be developed with management and staff and should cover such things as: principles of responsibilities and duties of Board members. legal. ethics and values. In setting a standard that you expect people in the organisation to work to. An important aspect in developing a performance measurement framework is the definition of the roles of each Board member. etc. it is important to have in place some formal means of establishing an expected level of performance and to assess if it is being achieved. management and staff. 6. Given that members of Boards are largely volunteers. On the other hand. This should assist in ensuring that the Board does not make decisions purely on an emotive basis. including those who are independent of the organisation. As such. marketing. Performance: A means of assessing the performance of Board members should be in place. objective representation on the Board. 8.
reports should incorporate not just actual achievements. Reporting should also enable assessment of the performance of the management and staff. a successor is appointed based upon their qualifications. However. should be based on specific selection criteria. the system of internal control over financial reporting. when required. whether internally or externally. if the organisation does not have access to these resources. but not so complex that it confuses the key issues being reported. For larger organisations. Therefore. experience and suitability for the role. Financial and operational reporting: Timely financial and operational reporting is important in ensuring that organisation s performance is accessible so as to assist in decision making. and the organisation s process for monitoring compliance with laws and regulations. but projected or budgeted targets that should have been achieved. an audit committee of non executive (independent) Board members can be useful in considering audit related issues in more depth than would normally be undertaken by the full Board.However. Audit committees: An audit committee s role is to assist the Board in fulfilling its oversight responsibilities for the financial reporting process. This is to ensure that. . 10. The selection of a business manager. the Board should be aware of this risk and review it and act accordingly. The Board should establish an agreed format for reporting to ensure that all matters that should be reported are reported. the audit committee should not act as a barrier between the auditor and the full Board or presume to overtake the functions of the full Board. Reporting needs to be comprehensive enough to ensure that you are well informed. the audit process. 9.
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