BRF WorldCom

8/12/2019 BRF WorldCom

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CORPORATE CRIME &

FAILURE OFCORPORATE

GOVERNANCE


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What is Corporate

Governance?

Corporate governance refers to the system bywhich corporations are directed and controlled.

It provides the structure through whichcorporations set and pursue their objectives.


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CASE STUDY :WORLDCOM

SCANDAL


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Companys profile

1993- 4 th largest with $1.5 billion revenue

1998- WorldCom and MCI announced its merger

1995: Changed its name to LDDS WorldCom


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From 1988-2002- 70 mergers and acquisitionspurchased 30 companies

Second largest telecommunication provider in the USafter AT&T in 1998 and 2002.

2000- Both companies terminated the merger process.

MCI WorldCom renamed itself simply "WorldCom".

1999, Sprint and MCI WorldCom announced amerger agreement, but remained unsuccessful.


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Total Bandwidth ,Connections & Revenues.Year: 2002


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CEO: BERNI EEBBERS

CF O: SCOTTSULLIVAN


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H ow it started?

As WorldCom was enjoying name and fame there was huge pressures both externally and internally to be no.1.

Competition

Merger or acquisition

Expenses of line costs

Pressure to meet expectation of Wall street


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Revenues fall short of expectations, while debt remains.

With failure of sprint merger it faced a severe setback.

Shareholders expectation

Profits


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Line costs?

WorldCom

customer in ChicagoWorldCom

customer in London

Local network

in Chicago

WorldComs

networkBritish

network


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HOW COOKING THE BOOKS WORKS!

Revenues xxx(no change) COGS xxx

(no change)

Computer expenses:xxx

(Huge Decrease)

Fees companies phonenetworks: xxx

(Huge Decrease)

NET INCOME

xxx

(Huge Increase )

CFOs directions

affected the incomestatement:


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Fraud

First, WorldCom'saccounting department

underreported 'linecosts

Second, The companyinflated revenue by $ 1

billion.


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H ow was it discovered?

Then Securities and Exchange Commission(SEC) launched an investigation.

Firstly by WorldCom's own internal auditdepartment- uncovered $3.8 b. of the

fraud.


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Largest Bankruptcy Filings

Company Assets(Billions)

When Filed

1. WorldCom $103.9 July 20022. Enron $63.4 Dec. 20013. Conseco $61.4 Dec. 20024. Texaco $35.9 April 19875. Financial Corp of

America$33.9 Sept. 1988

6. Global Crossing $30.2 Jan. 20027. PG&E $29.8 April 2001


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On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection, thelargest such filing in United States history .

The company emerged from Chapter 11 bankruptcy in 2004 becoming MCI.

On March 15, 2005 Bernard Ebbers (CEO) was found guilty of all charges andconvicted on fraud, conspiracy and filing false documents with regulators. He wassentenced to 25 years in prison.

December 2005, the Microsoft announced that MCI will join it by providing WindowsLive Messenger customers "Voice Over Internet Protocol" (VoIP) service.


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Consequences with regard to :

Stock Employees Shareholders

Company


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How DidThe Government

Respond?

Sarbanes Oxley Act


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Sarbanes Oxley Act

Section 302: Your CEO and CFO must sign statementsverifying the completeness and accuracy of financialreports.

Sections 404 CEOs, CFOs and outside auditors mustattest to the effectiveness and accuracy of financialreports.

Section 409: Companies must report material changes intheir financial conditions on a rapid and current basis.The act calls it real -time disclosure but is unclear onwhat it means.

Highlights


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Sarbanes Oxley Act

Behavior ConsequenceAny CEO or CFO who recklessly violateshis or her certification of the companys

financial statements.

If willfully violates.

Fine of up to $1,000,000 and/or up to 10years imprisonment.

Fine of up to $5 million and/or up to 20 yearsimprisonment.

Any person who corruptly alters,destroys, conceals, etc., any records ordocuments with the intent of impairing theintegrity of the record or document or use in

an official proceeding.

Fine and/or up to 20 years imprisonment.

Sarbanes Oxley Law


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Big expectations-bigger frauds

BRF WorldCom

Documents

Transcript of BRF WorldCom