Blame for the Bailout-AIG Harvard Case Solution & Analysis

What is the main problem of the company and why is it taking place?

The major problem is fraud at the independent place in the departments as well as at the upper level of the company. The fraud situation comes in place with an opportunity to the employees and top management to overlap the controls in the organization. There are many reasons that give rise to the fraud situation, and this ultimately leads the company towards bankruptcy.

The bankruptcy proved to be the largest bankruptcy in US. The bankruptcy was second in the last two years as the first was Enron has the same reason for the bankruptcy of management fraud. The fraud was from the top level of management to the junior manager because the major person was working on the origination had conducted fraud for the personal gain or pressure from seniors.

The first reason for this fraud was an opportunity that existed to take place in WorldCom. Each of the department had its set of rules and leadership style, therefore, the opportunity was there to have personal benefits at first place in the department. There was no written policy to follow the personal gain, therefore, were generated by overlapping the personnel policies.

World Com had bureaucracy style as the employees were under pressure to follow the instructions from the top, and they were not allowed to ask the question. This created de-motivation in employees and the employee tried to meet the targets given by top management through fraud.

The remuneration was very high as compared to the market averages, and the performance-based bonus was based on the profitability and revenue. Therefore, the fraud took place to have most of the bonuses in hand with the employees after conducting fraud in the company. Every department was accounting for its personal performance, therefore they were conducting fraud at the Department where it had no controls in place.

There was a downturn in the demand and the prices in the telecom industry in 2000. The company was famous for the higher revenue, and this recession made the situation to give the rise to the fraud to have the expected revenues in place. The employees were forced to have the revenue with any mean. Therefore, the employees took the steps to increase the sales only without considering the present and future cost to the company. The sales were increasing, and the managers earned the higher bonuses as well during the recession in the industry.

The employees made many long-term lease contracts with their customer for that the company was required to pay hefty fees in case of non-performance of the company up to the mark. The company bearded the cost of fees for the non-performance, and the revenues proved to be worthless, but that increased the revenue figure for the year end performances.

The lack of controls in place has raised the situation of fake sales and leased contracts. The personal benefits were in place because of the performance-based bonus of increasing the number of sales.

The sales increased, and the next thing was to show profitability as losses could hit the stock prices as the goal of the company was to have high stock values of Wall Street. The only way was to play with accounting rules to manipulate the profits throw accrual concept. The earning was manipulated by top management. The manipulation reported profitability that was, in fact, loss-making the situation for the company.

At World Com, everyone was under pressure to increase the revenues and manipulate the profits to secure their jobs and get some personal gains.

Explain at least 5 asymmetric information conflicts that are present in the firm?

In 2000, the company made many accrual adjustments in the general accounting. The entry was required to make an adjustment in million dollars through the accrual method of revenue recognition to increase the performance of the company. The Myers forced Schnee man to record in line accrual for his business unit, and the generals were changed accordingly to the instructions given by Myers (Controller). In another place, Myers also forces Timothy Schoenberg to have an adjustment of $370 million in general accounts by telling him that this guidance was given by Sullivan (CFO). The force was refused by Schoenberg, and then the transaction was recorded by the junior accountant with the consent of seniors..................

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