The Accounting Scandal at WorldCom*

            


Details

Case Code : CLBS046
Publication date : 2004
Subject : Business Strategy
Industry : Communication Infrastructure
Length : 03 Pages
Price : Rs. 50

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Key words:

WorldCom, Overstating Income, Operating Cost, Capital Expenditure, Line Cost Expenses, Understating Expenditure, Improper Accounting, Overstating cash flow and profit.


* This caselet is intended for use only in class discussions.
** More comprehensive case studies are priced at Rs.200 to Rs.700 (US $5 to US $16) per copy.

 


Abstract: ICMR India ICMR India ICMR India ICMR India RSS Feed

The caselet looks into the ways in which WorldCom corrupted its account books. The changes in business environment made the company to struggle in the market. The caselet delves into the pressure of the stockholders to continuously generate good returns, without any focus on the long term impact, and how that pressure made the company to get into fraudulent behavior.

Issues:

 » How companies corrupt the account books.
 » How “earnings pressure” affect the performance of a company.
 » The role of top management in perpetuating fraud in a company.

Introduction

In the 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...

Questions for Discussion:

1. WorldCom has been one of the most successful companies in the recent past. It was considered to be a socially responsible firm. Then why did it choose to be unethical?

2. What did WorldCom do to conceal its actual financial position?