WorldCom and Satyam: Accounting Scams in the US and India

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WorldCom's history dates back to 1983 when Bill Fields started a company in Hattiesburg, Mississippi, under the name "Long Distance Discount Services" (LDDS) to provide long distance telecommunication (telecom) services. In 1985, Bernie Ebbers (Ebbers) was appointed CEO of the company. In 1989, the company went public when it acquired Advantage Companies Inc., a publicly traded long distance telecom services company... About Satyam Satyam was incorporated in 1987 as a private limited company providing software development and consultancy services.

B Ramalinga Raju (Raju) and his brother Rama Raju were the promoters of the company. Before starting Satyam, they were involved in other businesses like construction and textiles. The company started operating from Hyderabad in India with 20 employees...

WorldCom's growth through acquisitions led to a mix of people and cultures. WorldCom encouraged a culture where employees were not allowed to question and were simply expected to do what they were asked. It was reported that the employees were unaware of the location of several WorldCom's offices...

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. The share prices of companies played a vital role during mergers and acquisitions. Therefore, companies made attempts to maintain the prices of their shares (that is, keep them sufficiently high)...

The line costs were estimated monthly at WorldCom. Though the bills for line costs were not paid for several months, the GAAP required WorldCom to estimate these expected payments and match these expenses with revenues in the income statement. Since the cash for this expense was unpaid, the offsetting entry was an accounting accrual to a liability account for the future payment that was owed to the line owner...

By the first quarter of 2001, the accrual release tactic could no longer work toward achieving the targeted E/R ratio since very few accruals were left to release. Sullivan, through Myers and Buford Yates (Yates), director of General Accounting at WorldCom, forced the managers to maintain the 42 percent E/R ratio...

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