CLASS: AU-DH41ISB-2

LECTURER: PHẠM THỊ NGỌC BÍCH

GROUP’S MEMBERS:
TRỊNH NHẬT HOÀNG PHAN THỊ NGỌC QUÝ
PHẠM QUANG NHẬT NGUYỄN ĐẶNG VÂN THI
NGUYỄN THỊ MỸ LINH HỒ ĐĂNG KHOA
 CONTENT
COMPANY INTRODUCTION
FRAUD
CONSEQUENCES
RESPONSIBILITIES
RECOMMENDATIONS
WORLDCOM INTRODUCTION
• WorldCom which was the third largest
telecommunications company in the US provided
of long distance phone services to both business
and residents.

• It started as a small company known as LONG

DISTANCE SERVICES (LDDS) that grew to become
one of the leading company in telecommunication
industry due to the management of Chief
Executive Officer Bernie Ebbers

• The main strategy of WorldCom were rapid

growth and development through acquisitions.
 REMARKABLE EVENTS IN HISTORY
1985 1992 1995 1998
Investor – Merged with Acquired WilTel Acquired MCI
Bernie Ebbers Advanced and change
became board Telecommunicatio name to
director of LDDS ns Corp. WorldCom Inc.

✦ ✦ ✦ ✦ ✦ ✦ ✦ ✦ ✦

1983 1989 1993 1996 1999

Murray Acquired Acquired three Acquired three Merged with
Waldron and Advantage long distance long distance Sprint Corp,
William Companies phone phone
Rector Inc. companies companies
planed to
establish
LDDS
KEY MEMBERS

WORLDCOM’S
BOARD OF
DIRECTORS
 FRAUD COMMITTED BY WORLDCOM

UNDERREPORTED INFLATED
THE LINE COST REVENUE

The fraud committed by WorldCom was characterized

mainly by the improper reduction of line costs and false
adjustments to report revenue growth
UNDER REPORTED LINE COST
WORLDCOM'S
CUSTOMER

Local phone
Local phone of Worldcom
of London
New York long
company's
company's line distance
line

Line cost Worldcom have to paid

=> Worldcom's top manager plan:

Release of accruals from 1999-
2000 followed by the capitalization
of line
costs in 2001 through early 2002
Because the lower
“Line cost E/R Ratio->
Achieved lower “Line cost E/R ratio the better performance
of the company
UNDER REPORTED LINE COST
• From 1999 to 2001 :Line cost expenses accounted for approximately half of the
company’s total expenses
• The amount have not yet been paid → ACCRUAL
• Under GAAP, if charges from service providers ˂ estimated, an accrual
was“released.”
• Hence, Q-II 1999: Management allegedly started order-ing several releases of
line cost accruals, often without any underlying analysisto support the releases
 • WorldCom initiated a process called ‘close the gap’
INFLATED REVENUE to falsify the information in company records
• There were meetings after every accounting
period between top management who helped to
change the records of the company. They would
receive a report called ‘Monthly Revenue’report
which showed the actual image of the company
• These records were heavily guarded by the
company’s securities
• Top executives would then make up and correct
the gaps between the major journal entries and
financial statements. This way they prepared the
company’s records for public presentation
• A total of approximately $958 million in revenue
was improperly recorded by WorldCom during
1999 –2002
 HOW WORLDCOM RELEASE ACCRUAL?

Released without Reep as “rainy Released without

even day” funds for established for
confirming if any future uses when line costs (violating
accruals existed in that accrual had GAAP by using one
the first place on its balance expense type to
sheet offset another)
FRAUD EVIDENCE
• Release without even confirming if any accrual existed in the first place
• Quater II 2000: even UUNET’s acting CFO David Schneeman refusal, Betty Vinson (in general
accouting) help completing Myers’s request (Myers is a CPA who served as senior vice president
and controller of WorldCom) by making a top-side corporate-level adjusting journal entry releasing
$50 million in line cost in UUNET accruals (UUNET is a largely autonomous WorldCom subsidiaryat
the time).
• Release without established for line cost
• In 2000, senior members of WorldCom’s corporate finance organization reportedly directed a
number of similar releases from accruals established for other reasons to offset domestic line cost
expenses
• When Wasserott (director of domestic telco accounting) refused to release $255 million in
domestic line cost accruals to reduce domestic line costexpenses, it's later emerged that
entire amount came instead from a release of a mass markets accrual related to
WorldCom’s selling gen-eral, and administrative expenses.
• After the close of Q-III of 2000 : During this time a number of entries were made to release
various accruals that reduced domesticline cost expenses by $828 million.
CAPITALIZING LINE COST
Capitalized the cost of leasing Cables when no more accrual should be
release.

2-5 year lease nows has 20-30 year lives which would slowly depreciation
over the next Two or Three decades

When the fraud was discovered the line costs was reduced by
approximately $3.883 billion
FRAUD TRIANGLE
• Opportunity
Pressure: Top
Rationalization: : management pressure was to meet
the• expectations
situationofin atanalysts at Wall Street
• The
Perpetrators WorldCom
the case ofof WorldCom,
the company's are
• control
Ebbers was structure:
upheld inthesociety
control
as aenvironment,
honest man
first-time offenders with no criminal
the
who accounting
was relied on system,
by the andgeneral
the control
public,
background
procedures. that allows
analysts, and investors them“guidance”
to provide to use
about
WorldCom'sinvestment
• rationalization top decisions
tomanagement
hide in WorldCom's
their dishonesty.
failed to accept
performance-> pressure to a continue to
• the
Withresponsibility
committing toa create fraudulent proper
act, work
the
contribute
environment. as the figure everyone looked upon
perpetrator believes he is not hurting anyone
•• Ebbers’s
WorldCom ostentatious
was in the process lifestyle created
of obtaining
even
pressure thoughhemostmadeinvestors will later have
multiple as acquisitions large purchases
at a fairly quickwith
ratethe
->
help
their of
little life
time loans
savings that
andused
to integratecollegeWorldCom
the funds
systems stock
evaporate. as
properly
collateral
and the manipulation of numbers could go
• undetected
Sullivan was building a mansion in Boca
Raton, Florida at the time.
CONSEQUENCES
• Mid 1999- $64.5 per share but after announcement-below $1 a share.
STOCK • Price fell below $1 a share ($0.6) upon news that might be further
accounting irregularities.

• Those who hold the company’s stock in their retirement plans(ESOP)

EMPLOYEES • 17,000 employees lost their jobs

SHAREHOLDER • $180 Billion of shareholder value lost

FUTURE OF THE • Their customers switch to other telecommunications carrier

• WorldCom was disqualified from further federal government
COMPANY contracts.
 WHO WAS MAINLY RESPONSIBLE FOR
THE DOWNFALL OF WORLDCOM?

NON- EXECUTIVE
BOARD OF DIRECTORS INTERNAL AUDIT TEAM
DIRECTORS

As they were involved As they were bribed

As they encouraged by Board and
with Board of
and were involved in Management to show
Directors in unhealthy
fraudulent and cheat their audit report
activities
clean
BOARD OF DIRECTORS
- The directors at WorldCom were from different backgrounds.
- Some had already got a widespread knowledge and
experience of business and legal issues, others were appointed
due to their connections with Ebbers (Breeden, 2003).
 The Board’s lack of awareness on WorldCom’s issues
- The Board was inactive and held meeting only about four to
six times a year (SEC, 2003), not enough for a company
growing at the rate that it was.
- The directors also depended on company growth and stock
appreciation for compensation, as did the employees and
management.
 The discussions did not involve the Board at all and at
other times no documents were even presented
concerning the terms of the transactions
BOARD OF DIRECTORS
- Senior Executives were encouraged to make fraud and
manipulate records by providing high margin of profits.
- Company was capitalizing its line costs. Line costs of
WorldCom classified as capital expenditure.
- Board members were mostly highly rewarded and consist of
the friends of Ebbers, who was not aware of the fraud while it
was occurring.
 Illegal profits were generated and it was shown that all
the policies and rules implemented from the top were for
the benefit of the company and shareholders, and hence,
were ethical.
BERNARD EBBERS
- Ebbers had made several purchases for which he had acquired loans and used his WorldCom stock as
collateral. Despite the very high level of his compensation, Ebbers put a great deal of his resources into
business unrelated to WorldCom (SEC, 2003)
- Instead of selling stocks, Ebbers requested the Board to approve personal loans to fill in the margins when
the price of stock fell
- Ebbers took advantage of the lack of independence of the board members who were his loyal friend
 When the Board found out about these loans, they failed to take any action and allowed the loans to
carry on.
INDEPENDENT AUDITOR’S RISK ASSESSMENT
• Andersen manually overrode this result and
increased WorldCom to a “maxi-mum risk” client.
• Andersen did not disclose that WorldCom was
considered a “maximum risk” client to the audit
committee (1)
Andersen’s Relationship with WorldCom:
- “long-term partnership”
- a committed member of [WorldCom’s] team”
- WorldCom was “a flagship client
- a ‘crown jewel’” of its firm.(2)

Andersen’s Restricted Access to Information:

WorldCom’s treasurer in 1998 allegedly
instructed him not to give Andersen access to
WorldCom’s computerized consolidation and
financial reporting system (3)
INTERNAL AUDIT DEPARTMENT DEFICIENCIES
• Internal Audit focused its audits primarily on the areas that were expected to yield cost savings or result in
additional revenues.
• In planning its audits, the department did not seem to conduct any quantifiable risk assessment of the
weaknesses or strengths of the company’s internal control system.
• its relationship with management,
• lack of budgetary resources,
• lack of substantive interaction with the external auditors,
• restricted access to relevant information.
RECOMMENDATION
AUDIT COMMITEE
Each member of the audit committee must be a
Board member and independent from management
The committee must oversee the corporation’s
internal control structure as well as making sure
that the company complies with “laws, regulations,
and standards”
The audit committee oversight the work of both
internal and external auditors to ensure the audit
process is efficient and be aware of the company‟s
operations
 INTERNAL CONTROL
 Establish proper “Tone at the top”

 Establish an environment where adherence to law and ethical standards is

said and practiced

 Develop and implement the corporation’s strategic plans with sufficient

identification, evaluation and management of risks inherent in the objectives

 Maintain healthy level of skepticism over “Management Override of Internal

Control”
EXTERNAL AUDITORS
An auditor must provide
an independent opinion
on the company and
prioritize the public
interest
CONCLUSION
REFERENCES
1. Board of Directors’ Special Investigative Committee Report, June 9,
2003, p. 27.
2. Board of Directors’ Special Investigative Committee Report, June 9,
2003, p. 225.
3. Board of Directors’ Special Investigative Committee Report, June 9,
2003, pp. 246–248.
4. REPORT OF INVESTIGATION BY THE SPECIAL INVESTIGATIVE
COMMITTEE OF THE BOARD OF DIRECTORS OF WORLDCOM, INC.
Retrieved from:
https://www.sec.gov/Archives/edgar/data/723527/0000931763
03001862/dex991.htm