Accounting Fraud At Worldcom Harvard Case Solution & Analysis

Back ground of company

In 1983, LDDS was formed by Bernard and Ebbers and partners. It began its operation in the year 1984 and it started offering services to local retail and commercial customers. LDDS like other small companies paid to use or lease facilities belonging to third parties.

LDDS paid for the services acquired by other companies to carry its operations. Line-cost was a significant cost for all the long distance carriers. Soon Ebbers was appointed as the CEO of the company to look up for the overall operations of the company.

Ebbers focused on acquiring small long distance companies with limited services areas. Through this strategy, Ebbers made the company profitable and the company started to grow in gradually. In 1989, LDDS became a public company through the merger with other companies. The company officially became known as World Com in the year 1995.

In the year 1996, World Com purchased MFS communications company. The company used its highly valued stock to outbid British telephone and GTE to acquire MCI; this was the largest takeover in the history of United States of America.

In the year 1999, World Com attempted to acquire Sprin thow ever;the U.S justice department refused to allow the merger on the terms that were acceptable to the two companies. This termination of merger had a great impact on World Com as the approach of increasing the size of the business by making mergers was no longer effective.

Introduction

World Com, a telecommunication company with a number of group companies, is a gigantic multinational company serving all over the United States. In the year 1980, it had aimed its customers’ satisfaction as well as established a brand image throughout the country. World Com had been awarded as an excellent telecommunication service company, which has always focused on its customer’s satisfaction and to keep the company loyalty high.

The company, in a very short period of time, has managed to become the second largest company in the United States in telecommunication industry.However,the company, after recession,started facing heavy losses and eventually the company, in the year 2002, applied for bankruptcy and liquidation.

The reason for such drastic step has constant losses and the manipulation in the financial records of the company which has been showing profits in the years when the whole industry was suffering from loses.

The company’s records were excessively manipulated over a long period of time to keep the expense to revenue ratio up to a particular level. On the detection of fraudulent financial reporting, the company went into dissolution.

Corporate culture

Overall, the company had a very strong autocratic style of management and used to follow a top down approach in managing the employees. As the size of the company became huge therefore,it was very difficult to carry a similar culture in all over the group.

Every department in the company had its own culture however;all the departments were operated under the same management style of autocratic style of management. The company had its department in different cities like the human resource department was in Florida and the legal department was in Washington D.C.

The employees were told to listen to the seniors and do as their seniors told them to do. The company had a strict approach as if a junior does not listen to a senior even if the employee refuses on ethical grounds, then he was supposed to leave the company or he would be fired.

Moreover, the CEO of the company, Ebbers, was of the view that making a corporate culture and code of ethics was a waste of time therefore;the only culture he was aware of was to make the employees listen to their seniors and do as they are told to do.

The CEO gave little importance to the legal, internal audit, sales and marketing departments. This was evident because most of the bonuses and rewards were awarded to the finance and accounts departments and the bonuses were given out of the salary contracts. The bonuses were never planned and favors were shown in giving bonuses.

The internal audit department had little authority on their part and they were held to report the CFO of the company, which made the internal audit department’s scope limited to other departments and not the accounts department.

Cook the books

When Bernard Ebbers was handed over the responsibility to look up for the operations of the company as the chief executive officer of the company, he started to increase the area of operations of World Com in a hope that this would increase the profitability of the company. The belief of CEO was that if the company expands in long distance services, then this will enable the company to earn more profits........................

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