BERLIN SCHOOL ECONOMICS AND LAW

BANKING ACADEMY OF VIETNAM

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TERM PAPER

M.A. Financial and Managerial Accounting Class

Guider: Prof.Dr. Rainer Stachuletz

Group 2:

Hoang Linh Chi

Pham Thu Hien

Doan Thu Nga

Tran Anh Quang

Pham To Quyen

Hanoi, 02 2012

TABLE OF CONTENT

A Introduction.........1

B Literature Review.........1

C Result....2

D Discussion ..2

I. Company back ground and development periods...2

1. Company background...2

2. Development periods2

2.1. Early stage of development..2

2.2. Pre-bankruptcy Circumstance...3

2.3. Going to bankruptcy (2002)..5

2.4. Effect on shareholder, creditor, employees...7

II. Causes to huge loss.................................8

1.1. External..8

1.2. Internal...........................................................9

III. Fraudulent activities10

1. Accounting frauds...10

1.1. Reducing line costs....11

1.2. Inflating revenue13

2. Corruption and bribery.14

2.1 Relationship with Arthur Andersen...14

2.2 Relationship with SSB (Salomon Smith Barney an investment banking operation of Citigroup) and securities analyst15

2.3 Relationship with Politician....16

IV. Market weaknesses based on Efficient Market Hypothesis.16

V. Recommendations from WorldCom scandal Practical lessons for Vietnamese companies17

1. The Sarbanes Oxley - Potential Governance.17

2. Policies of Government.18

3. Responsibility of the State Securities Commission of Vietnam (SSC).18

4. Audit quality..19

E Conclusion.19

Appendix (References).20

A INTRODUCTION

It is a common topic that why we need accounting. Asking that question of an accountant is like asking a farmer why we need rain. Accounting is needed because it is the only way for business to grow and flourish and financial reports are considered as an instrument to publish business activities of company. Nonetheless, there are more and more corporations used that instrument to conceal their loss and defraud investors. The case of Worldcom in 2002 is a clear proof. It was known as one of the largest bankruptcies in the American history which involves in finance. Worldcom made fraudulent financial statements by creative accounting tactics so as to deceive the loss inside company. Besides, creating non-transparent relationships with outsiders provided considerable support and protection to its development. Worldcom was such a powerful corporation that people hardly believed it could be collapsed. On 19 July 2002, it declared bankruptcy. Then an interesting question posed: Why did the giant collapse? - Accounting problems or market weaknesses? which all lead us to conduct a secondary research. In this term paper, analyses are given in details of the company background and its development periods, reasons to huge loss and fraudulent activities. Some lessons from this case for Vietnamese companies are added in the last part.

B - LITERATURE REVIEW

July 2002 witnessed Worldcoms filing for bankruptcy protection. This bankruptcy valued at $103.9 billion. Former WorldCom CEO, Bernie Ebbers, was sentenced to 25 years in prison on charge of securities fraud and cooking the books. WorldCom has collapsed; it made the U.S. economy lose around $10 billion, more than 20,000 people unemployed and created a chain reaction as the share prices of competitors in telecommunications industry had dropped down.There have already been numerous articles, studies about the collapse of Worldcom. However, those researches generally focused on fraudulent activities in details that did not give an overall look from outside to inside enterprise, from outside in the market to inside in the business. In this paper, external and internal factors leading to its huge loss first is demonstrated. Clear explanations of activities of accounting frauds, corruption and bribery to hide bad performance are shown. Remarkably, Efficient Market Hypothesis is applied to analyze the case from a broader viewpoint for the overall market. From that, lessons for Vietnam are strongly recommended.

C - RESULT

After conducting this secondary research, those are specified in some categories following. Worldcom showed a brilliant operational and financial performance to the public, however in the fact their business activities was going down for external and internal causes which are increasing market competitiveness, changing customer demands and poor corporate governance. Worldcom deceived it losses by treating line costs and revenue improperly. Specifically, from the first quarter of 1999 to the first quarter 2002, over $7 billion of line costs was reduced by releasing accruals and capitalizing operating expenses. In addition, revenue was overstated by over $2.6 billion by using management tool known as Corporation Unallocated schedule belonging to MonRev Report. It is found Worldcom bribed its auditor, investment bank, finance analyst and politicians. Also, Efficient Market Hypothesis stated three forms with different features is exploited adequately to supply theoretical base for broader market analysis.

D. DISCUSSION

I. Company background and development periods

1. Company background

Long Distance Discount Service (LLDS) was established in 1983 in Mississippi by Bernard Ebbers and operated as a long-distance reseller, primarily for AT&T Co. Mr. Ebbers who that later created WorldCom Empire, was born in Edmonton, Canada. He attended Mississippi College on a basketball scholarship and graduated in 1967 with a degree in physical education. At beginning, the company obtained a $650,000 loan from a local bank to buy a computer switch to route long-distance calls. Because AT&T was under court order to lease its phone lines cheaply to start up companies, LDDS could offer cut rates to small businesses and residents. In 1984, the Company had annual revenues of approximately $1 million.

2. Development periods

2.1. Early stage of development

Mr. Ebbers was selected to become CEO in 1985 with some senior personnel namely Scott Sullivan as Chief Financial Officer, David Myers as Senior Vice-President and Controller.

Under execution of CEO Ebbers, the company grew well, instituted the growth strategy by purchasing its regional rivals. In addition, he exercised diversification strategy to drive the company move away from its original business and forwarded to new potential areas such as data transmission, e-commercial, wireless services and internet. In 1989, LDDS went public through the acquisition of Advantage Companies, Inc. From 1998 to 2002, the company took place merger and acquisition of 35 companies by almost share-based payments. In 1995, by taking over WilTel, it stepped into voice and data areas and changed its name to WorldCom. One year later, WorldCom acquired MFS, an Internet-access provider for businesses, in a big deal valued at $14 billion. In the next business, WorldCom and MCI successfully combined, creating a record merger in history at that time. Then, they continued this strategy by proposing a merger with Sprint, a huge wireless service company; however, it was blocked by The Department of Justice due to probable harm to competition in telecommunications markets.

2.2. Pre-bankruptcy Circumstance

Along with the development of the world and United States (US) economy, US telecommunication industry had an extreme growth in 1990s by booming telephone, e-commercial, internet and data services. By merger and acquisition, WorldCom grew up rapidly, not only in terms of more market share, client, turnover but also reputation and stature to the company and CEO Ebbers. WorldCom became the second biggest telecommunications services company in US after AT&T; it played the second largest long distance carrier and the leading internet service supplier role. Its share price rose remarkably in overall 1990s and was a powerful currency for further acquisitions as can be seen as table below.

Figure 1: Worlcom Daily Closing Stock Prices per share (1990-1993) and Quarterly Revenues and Price per share 1Q94-3Q99

WorldComs revenue was growing gradually in many consecutive years and significantly in the last of 1990s. It reached the peak at 63.5 dollars per share on Jun 18, 1999 and announced turnover of 3,874 million dollars in 2000. At the time of its maximum share price in 1999, the giant telecommunications WorldCom was valued at $180 billion and employed over 80,000 people, and Bernard Ebbers laid claim to a personal fortune of just over $1.4 billion.

Financial Highlights199419992001

($ in billions)

Revenues$2.2 $37.1 $35.2

Total Assets$3.4 $91.1 $103.9

Employees (in 000's)7.597.687.8

Total Capitalization$4.1 $163.6 $72.8

Table 1: Overview of WorldCom

(Source: Original SEC Filings , before restatements for accounting fraud)

With giant growth, WorldCom quickly became top wing of NASDAQ stock exchange and ranked 42nd on the Fortune 500. Merger and acquisition brought huge market share with millions of clients, which spread over wide regions. An anti-monopoly report showed that, WorldCom could dominate Internet and data services. About internet infrastructure, over half of Internet service providers would receive a backbone connection through a merged WorldCom/MCI. It was estimated that 62% of Internet revenue generated by Internet providers would be derived from connections through WorldCom/MCI. Overall Internet revenues for the combined WorldCom-MCI were at least $1.5 billion.

WorldCom seemed to gain high prestige with partners, investors, banks and government. It got credit from about 30 big banks. It also closely related to politicians, Whitehouse and engaged in big contracts from US government and army. AT&T and Sprint, two major competitors, had experienced reduction in market share, whereas WorldCom had considerably stepped in fast growth in many years. Moreover, there were a large number of companies attending this industry.

(MCI is the major part of WorldCom)

Figure 2: Market Shares and Market Shares growth of Worldcom, ATT, Sprint (1998-2001)

2.3. Going to bankruptcy (2002)

March 11

Worldcom received a request for information from the U.S. Securities and Exchange Commission relating to accounting procedures and loans to officers

April 22-23

Standard and Poor , Moodys Investor Service and Fitch cut WorldCom's long-term and short-term corporate credit ratings.

April 30

CEO resigned when slumping share prices and SEC probed his personal loans. New CE0 John Sidgmore was assigned.

May 15

WorldCom said it would draw down a $2.65 billion bank credit line as it negotiates for a new $5 billion funding pact with its lenders

June 5

WorldCom announced it would exit the wireless resale business and cut jobs to reduce expenses and pare massive debts.

June 25

WorldCom fired CFO after uncovering improper accounting of $3.8 billion in expenses over five quarters starting in 2001. The company also said it will cut 17,000 jobs, or 20% of its work force.

June 26

SEC filed civil fraud charges against WorldCom and seek an order to prevent the company from disposing of assets, destroying documents and making extraordinary payments to senior officers.

NASDAQ market halted trading its two tracking stocks. Shares of Worldcom felt low as 9 cents before the halt.

July 2

WorldCom is working on funding proposals with its lenders to stave off bankruptcy.

July 8

CEO Ebbers and Ex-CFO Sullivan said they did nothing wrong and refused to answer questions.

July 17

Company agreed to freeze some assets for 80 days.

July 21

Worldcom filed for Chapter 11 bankruptcy protection but planned to emerge within 9 to 12 months. Additionally the company would hire a restructuring expert.

2.4. Effect on shareholder , creditor, employees

2.4.1. Shareholders

Until the case was resolved, WorldCom's stock plummeted from more than 64 USD / 1 stock to just over $ 1, it made the company's shareholders lost about $ 180 billion. In addition, Worlcom bankruptcy made the shares price of many other carriers also dropped down.

2.4.2. Creditors

It is estimated that Worldcom was in bank debt of approximately $ 4.5 billion. Three companies JP Morgan, Citigroup and Bank of America suffered great losses from the WorldCom fraud.

According to initial figures, about 60 other banks in the world (especially in the UK, Canada, Italy and the Netherlands) had borrowed or received a part of Worldcoms debt in the form of bonds.

Citigroup: $ 375 million

Mellon(US): $ 100 million

Barclays (US): $ 100 million

Aegon (Poland): $ 200 million

ABN Amro: approximated $ 100 million

Allianz (Germany) approximated $200 million

2. 4. 3. Employees

More than 22,000 Worldcom employees lost their jobs. Initially, these laid-off workers were left with nothing, even as the new Worldcom Board agreed to pay its new CEO $20 million over 3 years.

2.4.4. Competitors

Worldcoms bankruptcy had a dominant contagion effect for competitor. Overcapacity and other adverse trend had created a generally unstable environment in the industry.

Stock price of competitors declined because the bankruptcy of a giant revealed a negative signal about industry assets values and future prospects.

2.4.5. Others

State and local governments had been forced to make up for these losses by cutting vital public services. According to New York State Comptroller Alan Hevesi, police officers, fire- fighters, teachers and other public servants have lost their jobs and public services have been diminished throughout New York State because of these financial losses.

Public pensions and Talf-Hart-ley funds lost at least $70 billion. Public funds in almost every State suffered staggering losses, $ 1.2 billion in California, $ 393 million in New York, $ 277 million in Texas, $23 million in Utah.

II. Causes to huge loss

The companys problems started with the dot-com bubble burst and following reduced demand on infrastructure when it had the vast oversupply in telecommunications. The revenue had fallen while debt taken on to finance mergers and infrastructure investment remained. Ultimately, the market value of the companys common stock plunged from about $180 billion in January 2000. This huge loss was caused by external and internal factors:

1. External

During 1999, telecommunications industry analysts believed that growth rates for data traffic would outpace growth rates in voice traffic, and that Internet usage would create increased demand for broadband capacity. Some analysts also expressed concerns about both WorldCom s weakness in wireless technologies and its exposure to declining prices for long distance services.

Conditions in the telecommunications marketplace became increasingly difficult in 2000 along with a change in customers demand. The media companies were entering the long distance market, long distance carriers were entering the local call market, and many companies were going after the data revenues associated with the Internet boom. Competition was extremely vigorous, and a number of the competitors including incumbent local telephone companies were strong.

Industry conditions worsened in 2001. The number of competitive local telephone companies in operation dropped to 150 from 330 the previous year, and long distance carriers lost pricing power and market share to the media companies and other local telephone companies. Many companies had entered the market for Internet services in the late 1990s, and the resulting expansion in network capacity led to a glut in the market. Forecasts began to emerge in 2001 showing that supply would significantly exceed demand through 2003-2005, thus industry revenues and stock prices plummeted.

Worldcoms system infrastructure did not meet the change in market demand. Consequently, revenue of the business went down.

2. Internal

WorldCom s collapse reflected not only a external but also a major failure of corporate governance. The Board of Directors, though apparently are aware of external, played far too small role in the life, direction and culture of the Company.

The outside Directors had little or no involvement in the Company s business other than through attendance at Board meetings. Nearly all of the Directors were legacies of companies that WorldCom, under Ebbers s leadership, had acquired. They had ceded leadership to Ebbers when their companies were acquired, and in some cases their roles were diminished. Ebbers controlled the Boards agenda, discussions and decisions.

Ebbers was autocratic in his dealings with the Board, and the Board permitted it. With limited exceptions, the members of the Board were reluctant to challenge Ebbers even when they disagreed with him. Like most observers, they were impressed with the companys growth and Ebbers eputation, although they were in some cases mystified or perplexed by his style. There is no doubt that Worldcom was Ebbers company. The members of the Board were deferential to Ebbers and passive in their oversight until April 2002.

The outside Directors had virtually no interaction with Company operational or financial employees other than during the presentations they heard at meetings. While in this respect the Directors were far from unique among directors of large corporations, this lack of contact meant that they had little sense of the culture within the Company, or awareness of issues other than

those brought to them by a few senior managers. They were not themselves visible to employees, and there were no systems in place that could have encouraged employees to contact with concerns about either the accounting entries or operational matters. In short, the Board was removed and detached from the operations of WorldCom to the extent that its members had little sense of what was really going on within the Company.

WorldCom and Sprint had agreed to merge in a deal valued at $115 billion on October 5, 1999. It would gain Sprint s PCS wireless business, as well as long distance and local calling operations. However, the Antitrust Division of the United States Department of Justice refused to approve the Sprint merger on terms acceptable to WorldCom and Sprint, and the companies officially terminated their discussions on July 13, 2000. The termination of this merger was a significant event in WorldComs history. It was perceived to mean that large-scale mergers were no longer a viable means of expanding the business.

Even after the failed Sprint merger, Ebbers continued to'' shopping''. September 2000, WorldCom bought Intermedia Communications Inc., an Internet phone company is in trouble, with $1.6 billion. Intermedia had a controlling stake in Digex, operating Web sites for business.

For some managers, they show that Ebbers had been lost. '' It was agreed the most stupid of all time'', they said. '' We spent $ 1.6 billion to buy a company that only cost $ 50 million.'' However, they did nothing to stop it.

The organizational structure was not reasonable, poor management capacity and bad decisions in the administration were also in causes of Worlcom losses.

The deference of the Compensation Committee and the Board to Ebbers is illustrated by their decisions beginning in September 2000 to authorize corporate loans and guaranties that grew to over $400 million, which he borrowed money to bet on the shares of WorldCom. Mr. Ebbers actually transferred the loan to personal property, including a company that sold sports boat, a soybean farm and nearly 27 million shares of WorldCom. Hence, managers did not manage shares, a large amount in the hands of Ebbers, causing negative impacts on the general development.

III. Fraudulent activities

1. Accounting frauds

In attempt to hide its huge loss, Worldcom intentionally applied creative accounting in cooking income mainly by reducing line costs and inflating revenue.

1.1. Reducing line costs

It was discovered on statement on 25 June 2002 that Worldcom has made improper classification of 3.852 billion for line costs as capital expenditures in balance sheet rather than current expenses in income statement. As can be seen from the table below, the company deliberately decreased reported line costs by over $7 billion:

Table 2: Improper adjustments to line costs (millions of dollars)

1Q99

2Q99

3Q99

4Q99

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

Total

(41)

103

140

396

493

683

832

862

771

606

744

942

798

7,329

Line costs are what Worldcom pays outside service providers for using their telecommunication networks, which are access fees and transportation charges for messages. An example, a call from Worldcom customers from California to Paris starts from California phone companys line, then flow to Worldcoms own networks, and ends by getting passed to a French phone company. Worldcom has to pay both the local California phone company and the French provider. The above are line costs, Worldcoms largest single expense, occupying a half of the companys total expense from 1999 to 2001. It was in a common discussion for management to be kept down in level and trend.

Worldcom laid emphasis on one key measure of line costs to the public is line cost E/R ratio, the ratio of line cost expense to revenue, which is aimed to be remained at the level of 42%.

The improper accounting practices to reduce line costs took two main forms: release of accruals in 1999 and 2000 and then, when the accruals have been used up, capitalization of operating line costs in 2001 and early 2002.

1.1.1. Release of accruals

Accruals, a liability account on balance sheet, were amounts that had been reserved to fulfill its obligation to pay anticipated bills. Based on estimates which are difficult to make with precision, Worldcom may re-evaluate them periodically to see whether they are at appropriate levels. As proper accounting process, if actual bills are running higher than estimated amount, the accruals should be increased. In contrast, if they are lower, they should be decreased, or released. Because charges from its outside service providers are recognized lower than estimated, then release of accruals are made, simultaneously set off against reported line costs and pre-tax income becomes larger. An example, if an accruals of $100 million is established in the first period, $92 million is charged in fact, then in the second period, the excess amount of $8million will be released, reported line costs reduced by $8million and pre-tax income increased by $8million for that period.

The process of releasing accruals is made in three different ways:

i. It released without any evidence of whether the company actually had excess accruals amount or not, normally came from top-level instruction.

ii. It did not release actual excess accruals in the period they were identified, however kept them until bad period.

iii. It released accruals that had been established for other purposes

In 1999 and 2000, inappropriate accrual releases reduced reported international, United Kingdom and domestic line costs for a total of approximately $3.3 billion:

Table 3: Reductions to line costs from accrual releases (millions of dollars)

Line Costs

2Q99

3Q99

4Q99

1Q00

2Q00

3Q00

4Q00

TOTAL

Domestic

40

100

90

89

305

828

477

1,929

International

--

31

239

370

374

--

170

1,184

UK

--

--

--

34

--

--

--

34

Other

--

--

--

--

--

--

150

150

Total

40

131

329

493

679

828

797

3,297

1.1.2. Capitalization of line costs

Line costs were ongoing and operating expenses that should be recognized immediately and set off against revenue on income statement. Worldcom capitalized certain of its operating line costs as capital expenditures_ asset accounts on balance sheet _ then when put in service; they are depreciated gradually, or spread, over time. As a result, current income was exaggerated and the time these costs offset revenue was postponed.

From the first quarter of 2001 to the first quarter 2002, approximately $3.5billion of operating expenses were capitalized and $377 million were improperly adjusted additionally in order to reduce line costs during this period by a total of 3.883 billion.

Table 4: Reductions to Line Costs by Capitalization and Other Adjustments

(millions of dollars)

1Q01

2Q01

3Q01

4Q01

1Q02

Total

Capitalization

544

560

743

841

818

3,506

Other Adjustments

227

50

--

100

--

377

Total

771

610

743

941

818

3,883

An illustration for line costs capitalization can be described, in the first quarter 2001, on April 20, to reduce line costs by $771 million, placement of $629 million into Other long term assets and $142 million into Construction in Progress account were made. On April 23 and 24, $402 million from Other long term assets are transferred to Construction in progress account, increased total amount of Construction in Progress account to $544 million. The remaining $227 million was offset by accrual release from liability account. As a result, $771 million of line costs was decreased and $ 544 million was capitalized in violation of accounting standards in Construction in progress account, led to a line cost E/R ratio of 42% rather than 50%.

1.2. Inflating revenue

From the first quarter of 1999 to the first quarter of j2002, $958 million was the the identified amount of improperly recorded revenue, reflected Worldcoms sustainable growth.

Table 5: Improper Revenue entries (millions of dollars)

1Q99

2Q99

3Q99

4Q99

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

Total

85

5

65

50

19

121

161

27

17

132

117

92

67

958

Additional $1.107 billion of revenue items during this period had been questioned, due to lack of adequate support.

Table 6: Questionable Revenue Entries (millions of dollars)

1Q99

2Q99

3Q99

4Q99

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

Total

26

89

65

67

88

115

99

95

88

68

158

107

42

1,107

1.2.1. Revenue management instrument

The principal instrument by which Worldcom managed revenue performance was MonRev, a monthly report monitored by Revenue Accounting group, including an important part, Corporation Unallocated schedule. It reflected certain items that credit could not be offered for individual sales channel, such as revenue from sale of a corporate asset, a change of accounting policy for a contract. It was remarkable because most questionable entries were booked to this account and those only appeared in quarter-ending month, the week after the quarter ended.

1.2.2. Some specific revenue items

a. Minimum Deficiency Reserves

Minimum Deficiency charges occur from customer agreement which allow telecommunications company to bill customers for usage amounts lower than agreed minimum. However, it was found that Worldcom infrequently collected them.

In general, Worldcom reserved nearly 100% of the billings, accumulation of reserve balance was substantial. Then the total amount reached $180 million in the second quarter of 2000 that fall below revenue target of $195 billion. As instructed, three separate journal entries were booked to release approximately $100 million, thus making up the difference between reality and target.

As investigated, for the period from the fourth quarter of 1999 to fourth quarter of 2001, $312 million in revenue were overstated on Minimum Deficiency Reserves account

b. Customer credits

There is a common practice that telecommunications companies issue credits to customers for incorrect or overbilled amounts, especially when customers face up with installation or disruption problems. Those credits can be in the form of discounts of future billings or adjustments to previously issued invoices, which decrease revenue amount.

Prior to second quarter of 2001, Worldcom has recorded customer credits as contra-revenue account, which reduced revenue following proper accounting standards. However, from second quarter of 2001, the amount was reclassified to bad debt expense which did not have effect of reducing revenue.

Applying this theory, $215 million of customer credits was treated inappropriately between the second quarter of 2001 and the first quarter of 2002.

2. Corruption and bribery

2.1. Relationship with Arthur Andersen

Serving as WorldComs independent auditor from at least 1990 through April 2002, Andersen and WorldCom developed a close, long-term business relationship. In its year 2000 Audit Proposal, Andersen stated that it considered WorldCom as a flagship client and a Crown jewel of its firm. In term of the total amount of fees charged to clients, WorldCom was one of the Andersens top 20 engagements in 2000, and the largest client of its Jackson office, Mississippi. From 1999 through 2001, WorldCom paid Andersen $7.8 million in fees to audit the financial statement of WorldCom, Inc.; $6.6 million for other audits required by law in other countries; and about $50 million for consulting, litigation support and tax services. Andersens staff had the equivalent of approximately 10 to 12 people working full- time auditing WorldComs books. For its 2001 audit, Andersens team spent roughly 15,000 hours on the audit and charged $ 2 million.

By contrast, the Arthur Andersen work papers that support its audit opinions on the financial statements of the Company for 1999, 2000 and 2001, concluded that WorldCom was a maximum risk client. Moreover, Andersen apparently accepted without complaint to the Audit Committee that WorldCom managements refusal of its repeated requests for access to the computerized version of the General Ledger, which showed the inappropriate on-top adjustments. What is more, there are several obvious evidences of WorldCom Managements treatment of Andersen and withholding information from Andersen. And, though awareness of the restrictions imposed on its access to information, Andersen acquiesced instead informing the Audit Committee about this lack of cooperation.

2.2. Relationship with SSB (Salomon Smith Barney an investment banking operation of Citigroup) and securities analyst

SSB and its predecessors collectively received more engagements from WorldCom than any other investment banking firms in a long period, with more than $107 million earnings on approximately 23 investment banking deals.

SSB and its predecessors also allocated millions of dollar of valuable IPOs to a number of WorldCom directors, including Mr. Ebbers and Scott Sullivan, who in turn sold these shares for a considerable profit of more than $18 million. These IPO shares had influence on the decision of WorldCom executives to choose SSB as its investment banking firm.

Mr. Jack Grubman, Salomon Smith Barney s telecommunication analyst, repeatedly gave WorldComs stock highest ratings, enthusiastically urged investors to purchase WorldComs shares, even at that time he was advising WorldCom management on business strategy, acquisitions and investor relations.

2.3. Relationship with Politicians

WorldCom, like so many other corporations under investigation for duping investors, enjoyed considerable access to politicians of both parties and gladly spread its money around to keep the doors of power wide open.

Since the beginning of 2000, WorldCom has contributed more than $1 million to candidates, about half to Republicans, half to Democrats. It has paid much more for a stable of lobbyists who promote the company's views on Capitol Hill and at the White House. WorldCom also lobbied policymakers for an edge in the lucrative high-speed Internet market, contributed $100,000 to Republican fundraising gala featuring President Bush -- enough to be listed on the program as a vice chairman of the event. WorldCom, which has also sought tax breaks and other assistance, has been a top contributor to its hometown congressman, Charles W. "Chip" Pickering Jr. (R-Miss.), and once gave $1 million to the University of Mississippi's Trent Lott Leadership Institute, named in honor of the Senate's top Republican. As recently as one week before it revealed it had lied about its earnings, WorldCom Inc. was still trying to influence politicians in town.

IV. Market weaknesses based on Efficient Market Hypothesis

From the analysis above, it is convinced that Worldcom had tried to conceal its overall performance failure by accounting frauds, which is by the way of capitalizing line costs and overstating earnings. Besides, it developed a non-transparent relationship with Arthur Andersen in order to solely get financial statement audited by a large and reputed auditor. Ethical issues became worsen when it bribed investment banking firm, market analyst to get highest rating for its stock. The company sank deeper into morass of corruption by corrupting politicians, White House. By doing this, corporate image was enhanced and the company enjoyed a higher level of protection from the politicians. Those fraudulent activities to hide insider information on its affairs, operations, or financial position caused an information imbalance between company management, auditor, analyst and public. Then, the apparent effect is that share price is overvalued.

An important finance theory needs demonstrating in this paper is Efficient Market Hypothesis. This theory provides analytical base for market with three forms: strong, semi-strong and weak. The strong form claims that prices on traded assets instantly reflect past information, current information, even insider information. The semi-strong states that prices reflect all publicly available information. The weak form said prices already reflect all past publicly available information, and no insider information included. Also, it is impossible to use price information of the past to forecast future prices to earn superior return.

Based on this theory, Worldcom case can be continued analyzing in a broader view. Worldcoms share price reflected past information already, however no insider information. Investors could not predict its future prices from listed price due to information imbalance. By that it can be concluded that the market was in the weak form efficiency. Apparently, investors at that time had to suffer from big loss when its share price dropped down drastically from $64 to $1.

V. Recommendations from WorldCom scandal Practical lessons for Vietnamese companies

1. The Sarbanes-Oxley Act Potential Governance

The Sarbanes-Oxley Act (official name is the Public Company Accounting Reform and Investor Protection Act), also known as Sarbanes-Oxley, Sarbox or SOX, was enacted in 2002 to protect investors from corporate accounting fraud. The bill contains 11 titles, ranging from additional corporate board responsibilities to criminal penalties. The act also covers issues such as auditor independence, corporate governance, internal control assessment and financial disclosure. Followings are the major provisions of the act:

Chief executives and financial officers are held responsible for their public companies financial reports. They have to sign on and assure the accuracy and reliability of these reports. Longer jail sentences and larger fines are now imposed on executives who intentionally misstate financial statements.

Executive officers and directors may not solicit or accept loans from their companies.

Disclosure of executive compensation and profits is mandatory.

Internal audits as well as review and certification of audits by outside auditors are mandatory.

There will be criminal and civil penalties for securities violations.

Audit firms may no longer provide actuarial, legal, or consulting services to firms they audit.

Publicly traded companies must establish internal financial controls and have those controls audited annually by an independent auditor.

There is no doubt that it is necessary for Vietnam to have a similar Act like The Sarbanes-Oxley Act, so as to limit the deficiencies of transparency and accounting frauds of companies financial reports.

2. Policies of Government

It is fundamental to implement tightened policies against corruption and bribery, especially eliminating unhealthy relationships between financial institutions such as corporations, banks, audit firms Heavier penalties should be applied to deterrent executives who intend to abuse power to occupy loans for illegally personal interests. In addition, enterprises should be forbidden to allow top management of the companies focused on particular individuals, hence, to restrict the probability of abusing power for unhealthy gains.

3. Responsibility of the State Securities Commission of Vietnam (SSC)

The operation of Stock Market in Vietnam is needed to be under tight supervision of SSC. Like SEC (The Securities and Exchange Commission of the US), SSC play an important role in overseeing and regulating the securities markets. SSCs primary purpose is to protect investors and the integrity of the markets, including the management of listing of securities to prevent pushing the price of stocks for personal gains. Furthermore, it is a responsibility for Stock Exchange controller to administer the reliability of information provided by companies, assuring that investors would have right investments.

4. Audit quality

Applying and promoting Vietnamese Accounting Standards (VAS) and Auditing Standards are vital to govern the preparation of external financial reports and the audit of those reports. The Accounting Standards should be adjusted and revised to suit Vietnamese conditions, thus to ensure the relevance, reliability and comparability of the financial statements as well as the financial position of companies which provide useful information to investors in making investment and business decisions. Vietnamese Standards on Auditing are used for external audits of financial statements. Audit firms and auditors legally practicing their profession in Vietnam have the responsibility to implement these Standards in their operations. Therefore, Auditing Standard is need to be updated and developed in accordance with the characteristics of Vietnamese audit system.

Besides, one of the major reasons for failure of audit firms is lack of independence and transparency of auditing procedures. Therefore, it is essential to monitor the quality of operations and audit reports of audit firms, as well as enhance the profession and ethics in auditors.

E. CONCLUSION

This paper is to determine and explain WorldComs accounting fraud and to reveal the integrity of the Companys management, relationship with investment bankers, audit firm and politicians which resulted in the collapse of this US telecom giant the largest bankruptcy in the US history, and thus leading to the massive loss of hundreds of thousands of investors. WorldCom, the second-biggest long-distance phone company and the largest mover of internet traffic, admitted to inflate profit by classifying line cost as capital expenditures. Through a series of bribery with SSB investment bank, Arthur Andersen its external audit firms and other politicians, the company succeeded in cooking the books as well as making its stocks price overvalued due to illegal personal gains of a number of WorldCom s executives.

On the other hand, this survey also recommended some solutions and practical lessons for Vietnam, including the implement of act against creative accounting, corruption and bribery, enhancing the management of the government in general and Securities Commission of Vietnam in particularly to the Stock Market Besides this research, we hopefully expect to another further investigation in the near future with deeper and broader concentration on solution for Vietnamese corporations.

REFERENCES

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