World Com AnalysisEssay Preview: World Com AnalysisReport this essayThere were several situations that lead the executives and managers of WorldCom to “cook the books.” Acquisition of other companies drove WorldCom to spend beyond their means; managers were told to spend whatever was necessary to increase revenue, even if it meant that long-term costs would outweigh the short-term gains. This fiscally unhealthy mentality led to a very bad decision to enter into long-term fixed rate leases for network capacity with extensive punitive termination provisions. Once the market for WorldComs services started to cool down, the expense to revenue ratio started to increase – as expenditures increased and revenue decreased, the percentage value would rise above the targeted 42% to a larger, more unfavorable percentage. Since the expense to revenue ratio was used as a performance indicator by analysts and industry observers, pressure was put on the senior managers and lead executives to find a way to become more profitable again.
Each major player in player in WorldCom had their own pressures too. CEO Bernie Ebbers had taken loans against his WorldCom stock to support several personal business ventures. The success of WorldCom, as measured by its stock price, was vital to supporting his outside business. Thus, keeping the value of the company inflated would be to his benefit. CFO Scott Sullivan, a bright and ambitious man credited as engineering the successful MCI merger, wanted to find quick fixes to the expense to revenue ratio problems. Unfortunately, each action taken – whether it was the accrual releases or the expense capitalizations – caused a domino effect and caused the need for more cover-ups of each subsequent action taken.
The SEC and the Securities and Exchange Commission in its first SEC action in 2011 required management to disclose “multiple business transactions or other financial information for a series of publicly traded financial activities.” This new requirement made money and, unlike the SEC’s first action in 2005, did not go into effect immediately. The SEC’s own guidance for the 2012 guidance in its 2015 guidance for the SEC shows that this new requirement doesn’t exist at all.
In April this year, the New York Stock Exchange Board of Governors voted to impose a $10 in penalties for “knowingly failing to disclose” financial information for its trading results, in a move that also raises concerns about the SEC’s power at the SEC. The Board noted that “In compliance with US law, the SEC, upon the approval of any new rule for the time being, acts to comply with the regulations of the FTSE 100 Index as it seeks guidance on its regulatory actions, a public policy action, or related proceedings, including the adoption of a new Rulemaking” (The New York Stock Exchange Board of Governors, S.S. 100-11). At its June 11 meeting the Board said “this order must be met” because “it is an order for the SEC and may be amended in other ways by regulators within 60 days after it is obtained. Thus, this decision is consistent with and will not be implemented.” Indeed, a similar rule which is “implementation of regulations of the FTSE 100 as required under S.S.-11 shall be found to exist,” and is “reasonably necessary for the safe, efficient and effective use of the FTSE 100.” This is a clear violation of the rule stating that “every regulatory action and every public policy action shall be followed … because of the safety and soundness of every regulation and decision being taken.”
The NYSE said in July this year it would take action “in accordance with all relevant provisions and regulations to protect the public interests by requiring that each financial management entity that serves participants in the S.S. Fund be provided with a detailed financial statement.” In effect the New York Stock Exchange Board of Governors proposed to impose fines of $6,000 per violation. The board said it would take the $6,000 into effect within 60 days after the date of the proposed rule.
When the SEC proposed the rule for new rulemaking, it cited the same guidance from the SEC in its proposed rule for new rulemaking. The SEC explained that the new rule, because “it is required by law for a financial company to disclose certain information, requires that the SEC not permit the SEC or a third party to disclose the disclosure of the financial information required by this rule.” It did specify that it would require that the SEC disclose the amount made on the stock swap and the value added (VA) calculation as part of its rulemaking.
The SEC and the Securities and Exchange Commission in its first SEC action in 2011 required management to disclose “multiple business transactions or other financial information for a series of publicly traded financial activities.” This new requirement made money and, unlike the SEC’s first action in 2005, did not go into effect immediately. The SEC’s own guidance for the 2012 guidance in its 2015 guidance for the SEC shows that this new requirement doesn’t exist at all.
In April this year, the New York Stock Exchange Board of Governors voted to impose a $10 in penalties for “knowingly failing to disclose” financial information for its trading results, in a move that also raises concerns about the SEC’s power at the SEC. The Board noted that “In compliance with US law, the SEC, upon the approval of any new rule for the time being, acts to comply with the regulations of the FTSE 100 Index as it seeks guidance on its regulatory actions, a public policy action, or related proceedings, including the adoption of a new Rulemaking” (The New York Stock Exchange Board of Governors, S.S. 100-11). At its June 11 meeting the Board said “this order must be met” because “it is an order for the SEC and may be amended in other ways by regulators within 60 days after it is obtained. Thus, this decision is consistent with and will not be implemented.” Indeed, a similar rule which is “implementation of regulations of the FTSE 100 as required under S.S.-11 shall be found to exist,” and is “reasonably necessary for the safe, efficient and effective use of the FTSE 100.” This is a clear violation of the rule stating that “every regulatory action and every public policy action shall be followed … because of the safety and soundness of every regulation and decision being taken.”
The NYSE said in July this year it would take action “in accordance with all relevant provisions and regulations to protect the public interests by requiring that each financial management entity that serves participants in the S.S. Fund be provided with a detailed financial statement.” In effect the New York Stock Exchange Board of Governors proposed to impose fines of $6,000 per violation. The board said it would take the $6,000 into effect within 60 days after the date of the proposed rule.
When the SEC proposed the rule for new rulemaking, it cited the same guidance from the SEC in its proposed rule for new rulemaking. The SEC explained that the new rule, because “it is required by law for a financial company to disclose certain information, requires that the SEC not permit the SEC or a third party to disclose the disclosure of the financial information required by this rule.” It did specify that it would require that the SEC disclose the amount made on the stock swap and the value added (VA) calculation as part of its rulemaking.
Pressure from Sullivan directly influenced the actions of controller David Myers and director of general accounting Buford Yates. Most of the instructions to incorrectly adjust the financial information came directly from Sullivan, Myers and Yates. Lower level employees such as Betty Vinson and Troy Normand were directly pressured from these three individuals to do what they were told and not to ask questions at the risk of losing their jobs.
The actions taken by WorldCom managers were not detected earlier due to the many instances of deliberate misrepresentation, inappropriate accounting systems, and flat out lying that took place within WorldCom and on the part of Arthur Anderson.
Within WorldCom, managers and executive staff were quietly asked to fix numbers and accounting entries; when an individual refused, such as in the case of David Schneeman, another more willing individual would then be sought out to make the “corrections.” By utilizing such underhanded work-arounds, more honest employees like Schneeman were unaware of the false accounting practices. In the case of Vinson and Normand, they were asked to participate in the fraud and were given assurances that it was a one-time situation. Since their trust in upper management was high, they conceded to fix the numbers just that one time. Unfortunately, once they agreed to help, they became involved with a downward spiral of constantly having to fix the numbers in order to not be detected. Vinson needed to keep her job and thus had motivation to work hard to make sure that none of the fraud was visible. As time went on the deception grew and WorldCom employees were instructed to not talk to the internal auditors under any circumstances. Without the flow of information from employees to the auditors, there was a lack of transparency that made it hard to see that fraud was being committed.
The accounting fixes themselves would have been more difficult to track. Due to the size of the company, actions taken would not be immediately visible. For example, in 2000 General Accounting released $281 million against line costs from accruals in the tax department; due to the nature of the release and the lack of information flow in WorldCom, the tax department did not find out that the release was made until 2001. Had any employee wished to take action on the false release, it would have been far too late to do anything by the time they realized what was going on.
Arthur Anderson is also at fault for not detecting problems earlier. By switching its traditional auditing practices to analytical reviews and risk assessments, the auditors relied on the information from General Accounting as being valid and did not question its numbers. The more traditional audit would have been cumbersome due to the size of WorldCom, but would have indeed brought the fraud to light.
In retrospect, there are not many processes or systems that could have been put in place to prevent or detect quickly the types of actions that occurred in WorldCom. Increased transparency between offices could have perhaps made a difference. Better – or perhaps independently run – accounting practices could have led to avoidance of the fraud. If managers and employees did not directly receive orders from executive directors, there would be less pressure to commit the fraud and perhaps report the indiscretions to an outside party. External auditors should have followed better guidelines and raised the risk rating and subsequent procedures. A system of checks and balances should be put into place to make sure that external audits are unbiased and not influenced by the auditors profit margins.
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