WorldCom and Satyam: Accounting Scams in the US and India

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Case Details:

Case Code : FINC077
Case Length : 24 pages
Period : 2002-2009
Pub. Date : 2012
Teaching Note : Not Available
Organization : WorldCom, Satyam, Teach Mahindra, Mahindra Satyam
Industry : IT, IT Services, Telecommunication
Countries : US,India

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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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Largest Corporate Scams: Worldcom 2002 and Satyam 2009 Contd...

At this stage, the Board of Directors at WorldCom established a special investigation committee with the stated responsibility of conducting a full and independent investigation into the accounting irregularities that took place at WorldCom. In August 2002, WorldCom shocked stakeholders and industry observers yet again by reporting an additional improper reporting in its financial statements. This time around, the amount involved was US$ 3.3 billion, carried out by manipulating the EBITDA9 during 1999-2001, and the first quarter of 2002.10 By late 2002, the extent of misappropriation by WorldCom was estimated to be well over US$ 9 billion.11 The startling revelation by Raju in the Satyam case only served to deepen concerns about poor corporate governance practices in other companies in India as well.

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According to RK Gupta, Managing Director at Taurus Asset Management Company Limited12, "If a company's chairman himself says they built fictitious assets, who do you believe here? This has put a question mark on the entire corporate governance system in India."13 Experts opined that the future of over 50,000 employees and the numerous IT projects that Satyam had undertaken for companies across the world hung in the balance.14 At this juncture, the Government of India intervened and constituted a new board for the company. The board immediately reassured Satyam's employees and clients, raised money for working capital, and appointed new auditors to restate the accounts.

In April 2003, WorldCom changed its name to MCI and moved its corporate headquarters from Mississippi to Virginia. The company emerged from Chapter 11 bankruptcy in 2004. Subsequently, the company intended to pay various claims and settlements. Satyam, on its part, was acquired by Tech Mahindra on April 13, 2009. The merged entity was called Mahindra Satyam with C P Gurnani as its new CEO.

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9] Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) refer to a company's reported profit before the charges of depreciation and amortization (non-cash) interest and taxes (cash). It is calculated by deducting total expenses from the revenues in the period under consideration excluding the four expenses mentioned. Often used as a measure of a company’s financial performance, EBITDA has many critics as well who state that unlike cash flows, it can be very easily manipulated to please investors.
10] Rebekah A Sheely, "WorldCom: A Simple Recipe for Cooking the Books,", 2002.
11] "WorldCom Expects $9 Billion Restatement,", November 5, 2002.
12] India-based Taurus Asset Management Company Ltd. was incorporated in 1994.
13] "Accounting Scandal at Satyam Rocks Indian Economy,", January 9, 2009.
14] "50000 Satyam Employees Face Bleak Future,", January 19, 2009.

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