Analysis of WoldCom Scandal

Aslan GürdalHüseyin GültekinKamuran Koçak

Corporate Governance – Case Assignment

Agenda

WorldCom

Structure

Analysis

StakeholdersScandals & Problems

Facts

Organizational StructureBoard Structure

Owner Structure

Environment & MarketSWOT AnalysisStrategy

Agenda

Reasons for the problemsWhat do we recommend?Questions

WorldComCompany Information & Facts

Founded in 1983 in Hattiesburg , MississippiIt was the second-largest long-distance discount services in the U.S.Started as providing voice telephony serviceEntered to other markets through acquisitions

Data and satallite communicationsInternet ServicesWeb Hosting

WorldComCompany Information & Facts

Acquired over 60 companies in telecommunication industryChanged its name to MCI – Former merger company after filling for bankcrupcy protectionWrote-off 79.9B, the biggest one time write-off any US company has ever taken

WorldCom Company Information & Facts

Variety of people from many acquired companiesDepartmans are distantNot enough management control for distant parts

WorldComScandals / Problems

The biggest business scandal in U.S. HistoryBoard members were also Stakeholders/ShareholdersGrubman, an analyst from SSB, also attended board meetings as financial advisorAgency problem – Using company jets etc.When company gets bigger, risks were not seenInternal auditors did not probe the risksDirectors were «rubber stamp»ing the decisions of CEO

WorldComScandals / Problems

What Happened?

$11B inflated

30.000 lost jobs

$180B Losses For Investors

WorldCom Scandal2002

WorldComScandals / Problems

Main Player

• CEO: Bernie Ebbers

HOW HE DID?

• Under reported the costs by capitalizing rather than expensing

• inflated revenues with fake accounting entries

HOW HE CAUGHT?

• Internal auiditing departmen discovered $3.8 billion fraud

WorldComScandals / Problems

Legistlation

• CEO sentenceded 25 Years• CFO Fired• Controller Resigned• Company filled bunkcrupcy

25 Years

Congres passed the Sarbanes-Oxley Act., introducing the

most sweeping set of business regulations since 1930s

WorldComStakeholders

CEO was the biggest stakeholderMost of the directorsFinancial analysistInvestment banksOutside auditorsCustomers

StructureOwner/Shareholder Structure

Shar

ehol

ders

CEO – Bernie Ebbers

CFO – Scott Sullivan

Some board members

SSB

Public Investors

StructureBoard Structure

CEO Ebbers dominated the decisionsMost of directors were also shareholders Board of directors did not protect shareholders interest (Rubber stamp management decisions)Management steer internal auditors out of sensitive areasExtreme bonuses for top management

StructureOrganizational Structure

Variety of people from many acquired companiesAcqusion of over 60 companiesDepartmans are distantNot enough management control for distant parts

AnalysisStrategies

Rapid growth through acqusitionsFinances by loansEnters new businesses by using acquired companiesInorganic growthNominates directors to keep in the company

AnalysisSWOT Analysis

S OW TStrengths

-Second largest telecommunication company in the US--Acquisitions enables to enter new telecom markets

Opportunities

-Easy to take loans from investor and finance companies-- Hard to compare balances due to constant stream of acquisitions

Weaknesses

-Understaffed auditing department- Shareholders are also boardmembersDirectors only rubber stamp CEO decision-Agency Problem

Threats

-Increasing competition and new technology.-Rapid and inorganic growth-The risks were not considered seriously.

Industry and Environment Market and environment analysis

Recession of economyLack of government control over companiesIncreasing competition and new technology reduced revenue and profits Telecommunication industry experienced slowdowns

Reasons For The Problems

Organizational structureCEO was the biggest stakeholderUnreasonable loans to CEOFailing leadershipAgency problemNo backup plans

Reasons For The Problems

Reasons For The ProblemsFraud Triangle

Romney & Steinbart (2008),

What Do We Recommend?Ensuring the auditing is done independently.There should be non executive board members for controllingEnsuring internal audits and controls are functioning as plannedTaking the necessary steps to keep the controls working efficientlyCreating ethical policy throughout the companySellling some of non-core businesses such as wireless.Going on discussions with bank lendersCreating a new position of chief service and quality officerGetting rid of Groupthink habit.

What Do We Recommend?Internal Control Structure

Thank you for listening

Questions?