worldcom-grp 2
Transcript of worldcom-grp 2
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Ankit JainRohan Sharma
Tushar ShigwanSneha Agrawal
Sujay BachewarAbhinandan Nandanikar
Abhilash NairPayal Mody
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1985 : Group of motel owners
Location : Jackson , Mississippi
Company : Long Distance Discount
Service
CEO : Bernard Ebbers, Former basketball
Coach
During 1990s, worlds largest internetbackbone provider and carrier of
international voice traffic
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Dot Com Burst :Telecom Industry slows down
WorldCom Stock declines
CEO came under pressure from Banks to cover
margin calls
Started use of shady accounting methods to
mask its declining financial condition by falsely
professing financial growth & profitability to
increase the price of the stock
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Exaggerated earnings by $ 3 bn in 2001 and
reported lower costs and accomplished it by
two ways:-
The accounting dept. underreported 'linecosts by capitalizing these costs on the
balance sheet rather than properly expensing
them.
They inflated revenues with bogus accounting
entries from corporate unallocated revenue
accounts .
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Stock options as performance incentive made it
extremely lucrative for managers to keep stock
prices high
The executives especially CEO were
responsible for inflating the internet bubble
more than anyone else
Board approved $10 million for CEO; while
laying off 6000 employees
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On July 21, 2002, WorldCom filed for Chapter
11 bankruptcy protection
The largest such filing in United States history.
The company emerged from Chapter 11bankruptcy in 2004 becoming MCI.
On March 15, 2005 Bernard Ebbers (CEO) was
found guilty of all charges and convicted on
fraud, conspiracy and filing false documents
with regulators.
He was sentenced to 25 years in prison.
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Executives and Accounting Staff
6 individuals convicted of fraud / conspiracy / falsefilings
Ebbers CEO 25
years in prisonSullivan CFO 5 years in prisonMyers Controller 1 year in prisonYates Dir of Acctg 1 year in prisonVinson Acctg Dept 5 months in prison
Manager 5 months house arrestNormand Acctg Dept 3 years probation
ManagerAbove 6 individuals agreed to pay a total of $24-34M to
settle securities class action case
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He was obsessed with the company share price
reaching $100.
He was one of the biggest borrowers of the
Bank of America.During the 1990s, Ebbers total debt exceeded
$1 billion for yachts, farms, a marina, ranches
and personal gifts.
By April 2002 when it became clear that hecouldnt pay back the debt, the WorldCom
board requested his resignation with a
retirement package of $1 million per annum.
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Ebbers most loyal lieutenants
By age 37, he was named Americas one of the
Best CFO by CFO magazine
During the crash, he was directed by Ebbers to
capitalize operating expenses
He even directed the company Comptroller
David Myers to reduce the reported line costs
and increase reported earnings
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Jack Grubman (JG): Analyst at Salomon Smith Barney (SSB).
Considered as the telecommunications industryexpert and the ultimate power broker in the telecomindustry
The close relationship between SSB and WorldComcan be explained by the $22 billion of WorldComdeals that SSB underwrote
He was always buy on WorldCom His company allegedly gave unsuitable financialadvice to the employees of WorldCom to invest alarge portion of their retirement money in the stocksof the company
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Arthur Andersen was supporting WorldComs
management in misleading audits.
The motivation was substantial consulting workfrom WorldCom
Also in 2001, Arthur Andersens entire service
fees from WorldCom were $16.8 million andonly 26% of the fees were related to audit fees
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She was the Vice President, Internal Audit
She was the first person to sense that
something was terribly, terribly wrong
After the Enron case, where Arthur Andersenwas involved, Cynthia started doubting thecredibility of the external auditors
They started working till late night, retracingthe footsteps of the external auditors, workingbehind the back of management
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By May 2002, Cooper and her team discovered
the companys public reports had categorized
billions of dollars of operating costs as capital
expenditures
She then brought this enormous fraud to the
notice of the Audit Committee
After the debacle, Cooper was designated as
the Times person of the year.
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A good way to avoid management oversights isto subject the control mechanisms themselvesto periodic surprise auditsThe point is to make sure that internal audits
and controls are functioning as planned
It is a case of inspecting the inspectors andtaking the necessary steps to keep the
controls working efficiently
It is up to Top Management to send a clear &pragmatic message to all employees that goodethics is still the foundation of good business
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Be aware of your environment
No job is worth breaking the law or committing
unethical acts for
Transparency
Documentation & Internal controls
Increased operational effectiveness
Systematized process for early identification of
business risks/ whistle blowing issues/incident
management
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