Case Study in 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 Contd...

Worldcom: The Final Countdown

As media, legal and investor unrest intensified against WorldCom, there was little hope left for the company. The company was required to pay $ 172 million in interest and debt in 2002, which was to increase further to $ 1.7 billion and $ 2.6 billion as a part of the repayment schedule in 2003 and 2004.

Analysts remarked that the company, which had a negative cash flow of $ 871 million in 2001, would be able to generate only $ 564 million in free cash flow in 2002 and $ 1 billion in 2003. Considering the situation, many company observers predicted that the company would soon declare itself bankrupt. On April 19, 2002, the company revised its financial predictions for the year 2002, citing a downturn in the long distance consumer business. WorldCom announced that its revenues would range between $ 21 billion to $ 21.5 billion, as against the earlier projection of $ 22 billion. The overall revenues were supposed to drop by 5%. Similarly, the net income was expected to fall by 40% (to $ 1.6 billion approximately)...

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

Worldcom: Lessons From the Saga

WorldCom had an audit committee consisting of 11 directors (refer Exhibit V for the board's composition), eight of whom were independent.

The objective of the audit committee was to review the company's financial statements, monitor internal accounting control activities, communicate with the company's external auditors and review internal accounting control activities.

However, media reports claimed that WorldCom's board of directors failed to fulfill their basic responsibilities. Analysts also felt that apart from inefficient corporate governance practices followed by the company, the naivety of the investors was also equally responsible for the crisis. They felt that the investors should have demanded for more transparency in the accounting systems...

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

Worldcom: The Aftermath

In November 2002, Michael D. Capellas (Capellas, Former President, Hewlett-Packard) was appointed as the Chairman and CEO of WorldCom. Despite the bankruptcy proceedings and the legal troubles, WorldCom officials seemed rather positive about the company's future. John Sidgmore (Retiring CEO) said that the company's focus would be on reorganizing, regaining financial strength, and operating with the highest integrity. He also said that the company would emerge from chapter 11 as quickly as possible and with their competitive spirit intact...

Exhibits

Exhibit I: Worldcom & Subsidiaries - Consolidated Balance Sheets
Exhibit II: Worldcom & Subsidiaries - Consolidated Statements of Operations
Exhibit III: Worldcom & Subsidiaries - Consolidated Statements of Cash Flows
Exhibit IV: Worldcom & MCI - Stock Price Movements
Exhibit V: Worldcom's Board of Directors Prior to the Scam
Exhibit VI: New Corporate Governance Rules by the SEC and the New York Stock Exchange (NYSE)


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