Over the past 10 years, the world has seen a huge number of corporate scandals, bankruptcies and court cases related to the fraud of top managers of companies. Fraudulent financial reporting, tax evasion and the establishment of illegal financial schemes are the reasons for high-profile corporate scandals in the United States. A few giant companies declared bankruptcy due to fraud. WorldCom was one of them along with Enron, Kmart, and other companies. The WorldCom Company was created in 1983 (Jeter, 2004). Among the founders of the company were a basketball player, a pizzeria worker, and a DJ. Accordingly, they did not have any experience in this field. However, it was enough to create a telecommunications giant. WorldCom was one of the fastest-growing companies in the ’90s (Jeter, 2004). Nevertheless, it was later discovered that the telecommunication company conducted huge fraud activities in its accounting. The scandal surrounding WorldCom reflected in the stock market of the United States.
WorldCom was one of the leaders in the provision of long-distance and international telecommunications services in the United States. It was also the largest provider in the country. In the book Disconnected: Deceit and Betrayal at WorldCom, the author mentions that “WorldCom also provided support for law enforcement and homeland security agencies as well as agencies connected with national security” (Jeter, 2004, p. 5). In 1997, by the number and length of its fiber-optic networks, WorldCom was already in a leading position among all providers in the United States. Some major publications recognized WorldCom as the major operator. By this time, the company’s turnover reached more than the US $ 5 billion. It was 80% higher than for the same figures in 1995. One of the best acquisitions of that time was the purchase of MCI Communications in 1998. It was a telecommunication operator for the long distance in the United States. The transaction was very impressive in terms of volumes. It was $ 40 billion. In addition, at the time of the acquisition, the acquired company MCI was almost 3 times smaller than Bernard Ebbers’ company. Meanwhile, the number of employees at WorldCom reached more than seventy-five thousand people around the world. In 1999, the estimated value of all the shares of this joint-stock company was more than one hundred and twenty billion dollars. However, this success could not last forever (Jeter, 2004).
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At a certain stage, a strategy for development through continuous acquisitions turned to a decline in the quality of customer service. As a result, WorldCom lost its reputation and millions in compensation payments. As a result of numerous acquisitions, the company had to integrate 20 different networks and billing systems (Jeter, 2004). Nevertheless, the WorldCom management consisting of the heads of several affiliated companies and not coalesced into a coherent whole unit did not have enough talent to manage a business of this magnitude. According to many industry experts, permanent acquisitions were a key to success of the WorldCom and, in particular, its ideologist Bernhard Ebbers.
In 1999, while trying to absorb Sprint Corp – one of the largest telecommunication companies in the world, WorldCom was faced with the opposition of the United States Anti-Monopoly Service. The latter blocked the transaction. “The termination of this merger was a significant event in WorldCom’s history” (Kaplan & Kiron, 2007, p. 2). In 2000, the leadership of the company started experiencing financial difficulties. The projected revenues of the company fell by 40%. Moreover, the company’s attempts to fix the situation did not lead to the desired results. At this time, shareholders initiated the first lawsuit against the company (Jeter, 2004).
In March 2002, Bernhard Ebbers’ career ended with his resignation from the company. A little later, a number of frauds in the financial statements of WorldCom were revealed. As shown by numerous studies of this fact, the company artificially kept its positions in the rankings (Anastasi, 2004). A part of the WorldCom costs in the sum of over $ 3.8 billion was considered as capital expenditures. They were the costs allocated to the year ahead. In such a way, the company remained attractive to investors. Within a few months, the company struggled to get out of a difficult situation. The leadership of the company approached various methods to save the situation – from firing more than 3 thousand employees to obtaining large loans in billions. However, nothing helped. In the spring of 2002, in a couple of months after the departure of Bernard Ebbers, the company declared its bankruptcy. Its leadership was arrested. As Joe Anastasi mentions “At seven o’clock in the morning, and only a short 37 days after WorldCom disclosed the biggest corporate accounting fraud in history, WorldCom’s former chief financial officer, Scott D. Sullivan, and its former controller, David Myers, surrendered themselves to FBI agents in Manhattan” (Anastasi, 2004, p. 108).
WorldCom has beaten a former record of the overstating of profits. The company was able to inflate profits by billions of dollars with the help of a very simple accounting scheme. It marked many everyday expenses as investments in fixed assets. As a result, these corporate costs did not fall in the profit and loss account, and the company seemed more profitable than in reality. In 2001, Chief Financial Officer, Scott Sullivan, with his willful decision moved a part of the operating costs in the category of capital investments (Anastasi, 2004). Thereby, he increased the company’s profits by the amount of this part. He was not the only one who manipulated the accounting. “Bernard Ebbers, the CEO of WorldCom, had enjoyed the rising price of his holdings in WorldCom’s stock” (Meade, 2013, p. 3).
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The nature of these manipulations should be explained. The company interprets its operational costs as the financial results. At the same time, it capitalizes on those costs, which will be used for the production or sale of goods or services. The line between those costs that should be included in the result (thus reducing the income) and those that need to be capitalized is fairly obvious. The simplest example of repairs. In the case of current repairs of a switchboard, money spent on it will reduce the profit. However, if the repair will be fundamental and in parallel, people significantly improve the performance of the switch, all expenses incurred will increase the cost of the switch.
Additional findings were discovered in the course of an internal investigation, which took place within the company. It was found that the financial department of the company included about $ 3.8 billion of operating expenses in the graph of investment in its reports for the last 15 months (Anastasi, 2004). This fact allowed to fictitiously increase the volume of cash and inflate the size of the company’s profits. When this information reached the general public, there was a real scandal. On this wave, the stock index fell in Europe and Asia – in some cases up to 4.5% (Anastasi, 2004). Jack Hayes states that “Major companies such as the WorldCom and Enrons of the world are not the only ones falling victims to a variety of internal frauds” (Hayes, 2001, p. 3). The most high-profile bankruptcies – the companies Global Crossing and Adelphia, have already led to significant losses of investor’s confidence in the financial market. In such a way, the WorldCom scandal became another situation that distressed the financial market. Stock indexes fell rapidly throughout the world. WorldCom’s problems generated mistrust primarily in the telecommunications sector. The shares of all companies in the industry decreased in value by a few points. Shares of WorldCom, which in June 1999 cost $ 62, lost 94% of the price (Anastasi, 2004).
The scandal surrounding WorldCom is extremely reminiscent of the experience of Enron. As well as the bankrupted Enron, WorldCom distorted the reports underestimating its own expenses by nearly $ 3.8 billion and overstating the profit respectively (Meade, 2013). It was considered earlier that the corporation earned $ 1.4 billion in 2001 and $ 130 million in 2002 (Meade, 2013). It should be noted that WorldCom’s auditor was Arthur Andersen Company. It also checked the securities of the company Enron. Investors assume that WorldCom auditors were helping management deceive shareholders for a long period of time. In a statement, Andersen said that WorldCom had concealed important information and did not inform the auditor about the accounting measures for expenses. The auditor recommended that the new leadership should not rely on WorldCom’s financial statements of 2001 and the first quarter of 2002 (Meade, 2013).
The founders of WorldCom were young and ambitious. They wanted to create a company that would not have competitors in the telecommunication market. For a while, they were able to achieve these results. The company was engaged in providing services of the favorable long distance and international telecommunications services. Bernard Ebbers – one of the founders of the company – was considered a very bright and dedicated person, who, if desired, could achieve any result and persuade any counterparty. However, from an ethical point of view, he performed a terrible thing. Due to his sophisticated financial fraud, many unsuspecting people became victims. From an ethical point of view, all the people implicated in this fraud are thieves. In this case, human deception became an evil and destructive force for the company. Accounting fraud at WorldCom is distinguished by adaptability, dynamism and the ability of modernization. These days, fraud is widely prevalent. It is extremely diverse, volatile and increasingly sophisticated. It has become a mass phenomenon. Managers need to be ethical leaders. The influence of examples that they give to their employees is extremely significant. If the manager steals, lies manipulate others and uses them in own interests, he will send the same signal to the employees.
In general, a large number of financial transactions and reporting indicators such as the capitalization of costs, amortization, stock assessment, creation of reserves and determination of the costs on the basis of the future cash flows require management’s critical evaluation. When deciding on performance indicators, the leadership may be tempted to provide information and results in the most advantageous way. Therefore, when considering the performance indicators, it is necessary to remember the general principle of prudence. It suggests a greater willingness to recognize common obligations and prevent the creation of hidden reserves. Among the indicators that require the evaluation of management’s judgment, goodwill plays a key role and is often referred to. In preparing the IFRS (International Financial Reporting Standards) accounts, the valuation of goodwill impairment is based on future cash flows. Thus, the cost for the goodwill arises mainly because of the expected synergies from the merger. However, as the experience shows, expectations are often unmet. This fact leads to goodwill write-offs. The lure of the leadership is expressed in a desire to disregard goodwill during an acquisition or not damage it after capitalization. In such a way, the cause of the corporate scandal at WorldCom is the desire of the leadership to hide the real profits of the company. The management and the audit firm of the company violated numerous ethical principles. In my opinion, it is a situation of conflict of interest. Moreover, it is a conflict between the leaders of the organization and customers. They put their interests above the interests of investors and customers. If a conflict of interest exists, sooner or later, it will play a significant role and cause losses and infringement of interests of the clients. In such a way, the conflict is due to the fact that the logic of modern management strategies and market laws put the increase of business’ financial values above reputation and the good name of the company.
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Broadly speaking, a conflict of interests consists of the inability to perform two functions simultaneously and equally effectively. It exists when the performance of one excludes the fair implementation of the other and thus, affects the effectiveness and objectivity of the work. It is necessary to recognize that in the process of a transitional economy, there are more possibilities of using the conflict of interests for personal gain. The interest of certain people in the information abuse or ability to influence the decision is much higher than a concern for a company’s reputation. Conflicts of interest must be discussed and disclosed not only at the level of the company’s management but also at the public level. They should be displayed in the annual report of an enterprise.
If I were in charge of a large company, I would care more about the reputation rather than an increase in the company’s profit. There is nothing more valuable than a good name of the company that will bring new clients to the company unlike the artificial increase in its profits. A good head of the company should lead all the accounting in a proper way. Therefore, much depends on the audit firms. In order to build a successful company, it is extremely important to be a good leader and a role model for the employees. It means that a manager should always tell the truth and not conceal or manipulate information. It is necessary to remember that a bad truth is better than a bad lie. Since it is impossible to enforce honesty at an organization with some regulations, leaders need to stimulate it. They should be honest and able to admit their mistakes.
The second thing that a good leader needs to do is share the values. It means that the leader needs to communicate with employees and tell them about beliefs, ethics, and values. A manager should also emphasize the most important common values of corporate culture through the use of visual displays such as symbols, slogans, and ceremonies. In addition, a reward system can help ensure that all the members will report on the basis of core values adopted by the organization. In other words, the leader must clearly demonstrate what behavior is encouraged and rewarded in the company, and what is punished.
In addition to the leader’s behavior, auditing firms are an extremely important factor in the success of the company. At some point, their interests may intersect with the interests of top managers of corporations. However, for large companies, cooperation with one of the leading audit firms becomes a kind of quality mark. Collaboration with a well-known certified audit company is an extremely powerful proof of a strong position in the economy and financial market. Criticizing audit techniques, there is a solution in the search for such approaches to taxation, which would remedy the contradiction with the company. From this perspective, the main thing is not a choice of a more accurate financial accounting system, but a fundamental change in the approach to reporting. Firstly, I would make a public announcement about the company’s obligations to pay taxes. Although they are of little interest to investors, financial analysts will be able to assess the financial statements more accurately. The tendency towards corporations’ transparency is inherent in the very nature of the shared capital. In such a way, its development is an objective process. In addition to this first step, there is a need to develop new reporting requirements to facilitate the correspondence of leading data on profits and tax liabilities. However, in the formulation of this task, there is a fundamental contradiction. In fact, with an increase in profits, tax liabilities should also grow. These requirements will reduce the motivation of companies to make bigger profits. It is, therefore, necessary to find a solution. Thus, the company should pay higher taxes only on the portion of income that is artificially inflated. Then, blowing the profits, the company will automatically increase its tax obligations. This fact will keep companies from doing so. Of course, it is easier to set the fines in proportion to the artificial profit margin. However, it all rests on the need to create a service for monitoring auditors, which is very problematic due to high costs and low feasibility.
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According to financial analysts, the WorldCom scandal was one of the biggest frauds in the history of the accounting professions. In such a way, WorldCom broke the previous record of overstatement of profits compared to which the violations of Enron look like childish pranks. WorldCom was one of the fastest-growing companies in the ’90s. Once, it even was one of the largest enterprises in the United States. The scandal surrounding WorldCom inevitably reflected in the stock market of the United States. It is noteworthy that the auditor of the telecommunication company was the same Arthur Andersen that audited Enron. WorldCom managed to inflate its profits by billions of dollars using a simple accounting scheme. The company registered everyday expenses as investments in fixed assets. As a result, the company seemed more profitable for investors.