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

On June 26, 2002, the US-based telecommunications major WorldCom Group (WorldCom) received unprecedented media coverage worldwide. It was one occasion on which the company would, perhaps, have preferred to have kept out of the limelight.

The press coverage followed.WorldCom's announcement that it had misrepresented its financial statements by a staggering US$ 3.8 billion.1 With this, the company earned the dubious distinction of being involved in the largest accounting scandal in the US. The company admitted that it had resorted to fraudulent accounting practices for five quarters (four quarters of 2001 and the first quarter of 2002).

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Soon after, WorldCom terminated the services of some of its top executives including Scott Sullivan (Sullivan), the Chief Financial Officer, and David Myers (Myers), the Senior Vice President and Controller. The company's auditors held Sullivan responsible for the accounting mess and Sullivan was soon arrested on charges of fraud and misrepresentation.

While WorldCom's accounting scandal was touted to be the largest ever in the history of the US, the accounting fraud at the then fourth largest IT services company in India, Satyam Computers Services Limited (Satyam), was the largest ever in the corporate history in India. On January 7, 2009, B Ramalinga Raju (Raju), Founder and Chairman of Satyam, claimed that the company had been inflating the revenue and profit figures for several years. He confessed to an accounting fraud that amounted to Rs.70 billion or US$ 1.4 billion.2

With the sudden revelation of accounting irregularities, a series of events followed at both WorldCom and Satyam. A severe cash crunch at WorldCom forced it to lay off 17,000 workers, which constituted 20 percent of its global workforce.3 Eventually, the financial crisis forced WorldCom to file for reorganization under Chapter 114 of the Bankruptcy Code in July 2002. Subsequently, the company wrote down around US$ 82 billion (over 75 percent) of its reported assets.5 The bankruptcy put at risk services to 20 million retail customers and on government contracts, affecting 80 million social security beneficiaries, air traffic control for the Federal Aviation Association network management for the Department of Defense, and long distance services to the US Congress6 and the General Accounting Office.7 8

Largest Corporate Scams: Worldcom 2002 and Satyam 2009 Contd... - Next Page>>

1] Rebekah A Sheely, "WorldCom: A Simple Recipe for Cooking the Books,", 2002.
2] "Satyam Fraud Jeopardises its Projects in Andhra Pradesh,", January 8, 2009.
3] E A Torriero and Delroy Alexander, "Wake of Scandal," Chicago Tribune, June 29, 2002.
4] Chapter 11 of the US Bankruptcy Code provides debtors with a vehicle for operating their business under protection from the creditors while developing a plan for resolving their financial problems. The debtors could then develop a "plan of reorganization" that would enable them to operate successfully in the future, free from the burdens that precipitated the Chapter 11 filing in the first place.
5] Robert S Kaplan and David Kiron, "WorldCom,", September 14, 2007.
6] The US Congress represents the US federal government and comprises the US Senate and the House of Representatives. The powers of the Senate are described in the US Constitution.
7] General Accounting Office is the audit, evaluation, and investigative wing of the US Congress.
8] A C Fernando, "Business Ethics: An Indian Perspective," Pearson, 2010.

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