Finance Case Study - The WorldCom Accounting Scandal|Finance|Case Study|Case Studies

The WorldCom Accounting Scandal

            
 
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Case Details:

Case Code : FINC022
Case Length : 19 Pages
Period : 1990 - 2002
Pub. Date : 2002
Teaching Note :Not Available
Organization : WorldCom, Arthur Anderson
Industry : Telecom, Financial Services
Countries : USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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Excerpts

Worldcom: Genesis of the Frauds

In the early 1990s, the US economy went through a phase of consolidation, in which many major companies acquired or merged with weaker companies to strengthen their own position in the market (as seen earlier, WorldCom happened to be one of the key acquirers in this phase).

The share prices of companies play a vital role during mergers and acquisitions. Therefore companies try to 'maintain' the prices of their shares (that is, keep them sufficiently high). If they fail to do so, they can easily become targets for takeover/acquisition.

Moreover, if a company wishes to raise capital from the market, its performance on the stock exchange is considered to be very important. The companies are generally valued on the basis of cash flows they could generate in future. As the financial performance of a company is one of the most important (and direct) factors affecting its share price, companies were under constant pressure to show positive revenue streams...

Finance | Case Study in Management, Operations, Strategies, Finance, Case Studies

Worldcom: The Ebbers Angle

During the 1990s, Ebbers borrowed more than $ 1 billion for personal purposes from various banks. He pledged his WorldCom stock as collateral.

When the prices of the WorldCom stock began declining in the early 21st century, Ebbers' lenders began pressurizing him to sell the stock and raise cash to support his loans. Reportedly, Ebbers decided to sell some of his shares in the company to meet these personal liabilities.

However, fearing that the sale would result in a further drop in WorldCom's share prices, the company board decided to authorize loans to Ebbers so that he could pay off his debts. The company gave him loans to the extent of $ 408 million between 2000 and 2002. The company justified this by stating that it had to stop Ebbers from selling his stock in order to prevent a fall in the share prices of WorldCom...

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