Online Custom «WorldCom Corruption» Essay Sample

WorldCom Corruption

Starting its activity in 1983,WorldCom was one of the leading telecommunications companies. It expanded rapidly in the 1990s due to numerous large acquisitions. It was named WorldCom Inc. in 1995 after it purchased Williams Telecommunications Company at a cost of $2.5 billion. In 1998, WorldCom acquired MCI Communications Inc. at a cost of $40 billion to complete its biggest corporate merger. In 1998, the Company merged into CompuServe Corporation and Brooks Fiber Properties Inc. as well as Sprint Corporation in 1999. However, in 2002, the regulators from the US and Europe blocked the merger for fear the company would become too large, which consequently stunted its growth. Nevertheless, the acquisitions that the Company had already taken made it become competitive and make a profit. However, its stable growth and profits came to a standstill after the fraudulent financial reporting was finally uncovered. This paper will examine the way the fraud was committed, the relation of corruption to accounting, the consequences of the fraud, as well as the steps to avoid future fraud or corruption.

The Type of Fraud Committed; the Way It Was Committed

WorldCom was engaged in Financial Statement Fraud. According to Giroux (2013), this fraud is committed so that when the financial statements are audited, no material misrepresentations or misappropriations will be found by the auditor. The fraud was committed through reducing the reserve accounts and under-reporting the expenses.

Reducing the Reserve Accounts

The Company manipulated its accounting to improve the margin which could make the earnings impressive. It inflated its revenues with fake entries of accounting from the revenue accounts that were not allocated. It reduced its reserve accounts held to cover the liabilities of the companies it had acquired (Giroux, 2013). Around $2.8 billion from the reserves was increased to the revenue. Consequently, the profit margin between 1999 and 2000 improved persistently. Nevertheless, by 2001, the accounting manipulation was not adequate to sustain the earnings. The margin of operation declined to more than a half as likened to the earnings of the earlier years.

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Under-Reporting the Expenses

The accountants under-reported the line cost to increase the stock price. In 2000, it suffered a loss of 649 million. However, they fraudulently documented 2608 million profits. They were stated as capital investments on the balance sheet rather than as expenses. It showed that the Company was making much money and spending less. A portion of current expenses was moved to a capital account, thus increasing the net income and assets between 1999 and 2001 (Beachler & Shevory, 2014). In other words, instead of articulating expenses instantly, it capitalized the line cost to avoid losing billions of dollars.

Relation of Corruption to Accounting

Corruption can be related to accounting in many ways. First, few accountants can collude with the corrupt top management to commit the crime. When the former commit the fraud, the latter cover it and prevent prosecution to take place. In WorldCom, collusion led to the huge loss that could not be recovered. Moreover, weak internal controls can result in lack of independence in the accounts and audit department, thus creating the loophole for corruption. In the WorldCom, the weak internal control led to the interference with the audit committee (Jones, 2015). The accounting control was nonexistent, and the loss was huge; however, the audit committee ignored this issue and gave the Company a clean bill.

 
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Consequences of the Fraud

    One of the consequences is that the Company became bankrupt. Instead of filing for Chapter 7 bankruptcy, it restructured itself by filing for Chapter 11. This step was to show that it wanted to continue serving its customers (Infanti, 2015). It changed its name to become MCI and isolate itself from WorldCom. In essence, the $41 billion in debt that WorldCom had was restructured. This restructuring enabled the Company to reduce its costs, thus allowing its rivals to become more competitive and survive although there was the artificial decline in prices. Eventually, WorldCom was acquired by Verizon in 2006 at a cost of $8 billion. That price was not worth the Company's market cap large infrastructure.

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Though it might appear that the competitors of the WorldCom were beneficiaries of the downfall, the impact of the fraud on them was opposite. During the period of the fraud, the rivals such as AT&T and Sprint were sacking their employees and making poor decisions in order to continue competing with WorldCom. They discharged several workers to cut the cost of operation. However, they later realized that WorldCom was giving the false information in their financial statements (Johnstone, Gramling, & Rittenberg, 2015). Moreover, by giving WorldCom aid after its filing for Chapter 11 bankruptcy, the government provoked a decline in prices in the telecom industry which further affected these companies.

The fraud had a negative impact on WorldCom investors. The New York State Common Retirement Fund lost more than $300 million it has invested in WorldCom (McLean, Elkind, & Nocera, 2013). The HGK Asset Management lost nearly $130 million securities of the debt it had bought from WorldCom on behalf of the pension and benefit plan that was sponsored by the union. Banks, accountants, and brokers who aided the advancement of the fraud were given various punishments. They had to lose the market value of their stocks because of associating themselves with WorldCom (Jennings, 2012). In addition, they had to cater for additional costs that incurred in meeting the compliance and additional legal measures that were imposed on them.

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Steps to Avoid Future Fraud or Corruption

Know Your Employees

In many cases, those perpetrating fraud tend to behave in a manner that shows their intent to commit fraud. Listening and observing the employees can help the manager to identify the possible fraud risk (Pieth, 2012). The management should be involved with the workers to know them better. Frequent attitude change of employee can provide a clue of a risk. In addition, it can show internal problems that require attention.

Setting Up of the Reporting System

Every employee should be aware of the policy of the fraud risk as well as of the types of fraud and the penalties related to it. Those planning to commit fraud will know that management will deter them from this crime (Beachler & Shevory, 2014). Similarly, honest employees who do not want to commit fraud will also become aware of any its sign.

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Hire Experts

To prevent the fraud, the company should hire the experts. Experts such as Certified Public Accountants (CPA), Certified Fraud Examiners (CFE), and CPAs can help the management in creating antifraud procedures and policies (Pieth, 2012). These professionals can offer various services ranging from forensic analysis and complete internal control audits to general consultations.

Conclusion

WorldCom was one of the leading telecommunications industries. It expanded greatly due to numerous acquisitions. However, the profit flow of the Company slowed down after the fraudulent financial reporting was discovered. The management of the Company committed fraud through reducing the reserve account and under-reporting the expenses. It happened due to collusion between accountants and top management, as well as weak account control. Consequently, the Company became bankrupt, and it was later acquired by Verizon at loss. Its competitors were also affected because of the decline in prices in the telecom industry. To avoid such a scenario, the companies need to put various measures, including creating employee’s awareness and hiring experts.

 

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