Running Head: ACCOUNTING FRAUD AT WORLDCOM 1

Accounting Fraud at WorldCom

Jose Sermeno

Los Angeles Pacific University

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WorldCom was one of the largest telecommunication companies that shocked the world

by filing bankruptcy in July 2002. WorldCom made it possible by committing fraudulent actions

that would deceive the public. WorldCom initially started as a small company, which then grew

to become the third-largest telecommunications company in the United States, under

management and oversight of CEO Bernie Ebbers (Kaplan & Kiron, 2007). During the 1990s,

the telecommunications industry in the United States saw an uprising, which contributed to

increased expectations of a company’s performance. Unfortunately, its senior leadership and the

resulting corporate culture was fixated on maintaining its high price and began to make ever-

increasingly aggressive accounting decisions to prop up the stock artificially.

Eventually, the accounting fraud was exposed by Cynthia Cooper (Head of Internal

Audit), and WorldCom’s financials had to be restated; its pre-tax income had been overstated by

some $7 billion, and assets had to be written down by over $80 billion. Once word got out, the

public investigated the company and discovered a total of $11 billion in fraudulent numbers. The

resulting outcome of WorldCom’s failure was huge: market cap fell by almost $180 billion

wiping out shareholders, thousands of employees lost their jobs, and all employees’ retirement

accounts became nearly worthless, telecommunications service was jeopardized to 20 million

retail customers as well as critical parts of the US government. In the case of WorldCom, there

was a failure of leadership, culture, internal controls, internal audit, external audit, and the board

of directors. It is a remarkable and sobering story that so many safeguards and controls failed

simultaneously.

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. To
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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 (Obringer, 2005). The telecommunications industry conditions began to

deteriorate in 2000 due to heightened competition, overcapacity, and the reduced demand for

telecommunication services at the onset of the economic recession and the aftermath of the dot-

com bubble collapse. Failing telecommunications companies and new entrants were drastically

reducing their prices, and WorldCom was forced to match. The competitive situation puts

pressure on WorldCom’s most important performance indicator, the E/R ratio, closely monitored

by analysts and industry observers (Kaplan & Kiron, 2007).

Betty Vision was a senior manager in General Accounting, falsified documentation. The

first time is understandable, trying to follow orders and not get fired. However, when we start

falsifying documents over and over again, then getting rewarded for it, a person cannot play the

victim card anymore. Understandably, she didn’t have another job to go to, but when we are

falsifying documents that impact millions of people, now that is a significant issue.

Managers, leaders, or anybody in charge should respect their fellow coworkers and

employees. According to the article, Accounting Fraud at Worldcom (Kaplan & Kiron, 2007),

the leaders demanded their employees to complete specific tasks without asking any questions, to

listen to what they were told. Through experience, employees want to feel valued and

appreciated. If we as leaders make our employees feel valued and appreciated, they will give

their best effort at their work. However, if we bark orders, our employee’s productivity will

reflect our poor leadership, and their productivity would decrease. It is imperative as a manager

that we get to know our employees and what their strengths and weaknesses are; this way, we

can discover the best way to communicate with them. With this communication, we can make
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them feel valued and appreciated. It’s known that employees that feel like their employees care

like them will work harder and produce more than those who feel undervalued.

Another lesson managers, leaders, or anybody in charge should follow is doing the right

thing and following protocol. According to the article, Accounting Fraud at Worldcom (Kaplan

& Kiron, 2007), the leaders at Worldcom were engaging in unethical practices such as rewarding

individuals with bonuses that necessarily deserved a bonus, playing favoritism. Understandably,

we are pressured by individuals higher than us, threatening us with our job or the company

threatening us, but we should always do what is right and follow protocol to avoid any legal

actions towards us.

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References

Kaplan, R.S. & Kiron, D. (2017). Accounting fraud at WorldCom. Retrieved

from:https://services.hbsp.harvard.edu/api/courses/649520/items/104071-PDF-

ENG/sclinks/54c93dee513827c2d83cdadbcceacbc8

Obringer, L. A. (2005, August 16). How Cooking the Books Works. Retrieved from

https://money.howstuffworks.com/cooking-books9.htm