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WorldCom is a telecommunication giant in the US telecommunication industry. Faced with the slowdown in the telecommunication industry, WorldCom began to realize a decline in their stocks. …
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Download file to see previous pages WorldCom is a company that realized growth through evaluated mergers and acquisition that enabled it recorded immense growth and control in the telecommunication industry (Clikeman, 2009). After attaining a peak in the telecom boom, WorldCom Inc. was rated at $ 180 billion. Thereafter, the company company’s credit ratings declined and they started facing job cuts. Consequently, the share prices declined from $64 to $2.65. This decline in the stock prices caused a shock in the financial market and this negatively affected the telecommunication sector and shares of the other sectors of the economy. Banks intensified pressure on the then CEO, Benard Ebbers to restore margin calls on his WorldCom stock utilized in other endeavors (Markham, 2006). Because of the slow down turn, the company profitability was hardly hit in 2000 forcing the company to rescind its earlier decision to merge with Sprit. How the fraud was committed Considering the consolidated income of the company from 1997 to 2001, WorldCom realized a decline in the operating margin in 1988. In the year 2001, the operating margin was -5.51% compared to the previous year where the company realized a profit margin of 13.78% (Clikeman, 2009). Owing to this decline in performance, the management engaged in manipulation of the financial statements to conceal the performance that could result in the share prices. Investors are interested in the financial performance of a company and any loses can force investors withdraw their investment and cause companies to collapse. The manipulation of the financial statements was successful in the year 1999 and 2000 where a profit margin of 21.96% and 20.85% was reported. In 2001, it was impossible to hide the falsified statements to reflect better financial performance (Kaplan & Kiron, n.d.). In this year, the manipulated company profits declined from 20.85% in 2010 to 9.98%, a decline of more than 50%. This year saw the WorldCom split into MCI WorldCom Inc and WorldCom Inc that continued to sell voice and data to corporations. The question on the stability of WorldCom aggravated the situation in 2002 and saw investors start believing that WorldCom had off-balance sheet finances apart from the increasing debt that deteriorated the company’s status (Kaplan & Kiron, n.d.). Efforts by the CEO to explain that the whole industry was experiencing acute problems were ignored. The CEO asserted that competitors were going out of operation because of the hard economic times since the revenues declined sharply. The growth in the mobile phone usage further threw the telecom sector in many problems. WorldCom was compelled to restate the financial performance that revealed losses in the year 1999 to 2001. In the restatement, the capitalized line costs were reversed and the costs that were manipulated to show small amounts were corrected. Since the line costs account for about 40-45%, its manipulation had to result in material financial influences (Kaplan & Kiron, n.d.). For instance, the manipulatedincome statement showed a profit of $1407 million instead of a loss of $1648million, which is an accounting fraud. The violation of the generally accepted accounting standards by capitalizing expenses resulted in creation of worthless assets. This has been considered the largest accounting fraud that was straightforward and that should have been detected by simple audit procedures. In the year 2001, the CEO persuaded the board of directors to offer him a loan and guarantees summing to more than $400 million to cover the pressure from the banks. His request was however rejected by the board that was later ousted as the CEO of the company. The company CFO, ...Download file to see next pagesRead More
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