Casestudy-Accounting Fraud at Worldcom.Doc

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FRAUD AT WORLDCOM LDDS began operations in 1984 offering services to local retail and commercial customers in he southern states. It was initially a loss making enterprise, and thus hired Bernie J. (Bernie) Ebbers to run things. It took him less than a year to make the comoany profitable. By the end of 1993, LDDS was the fourth largest long distance carrier in the United States. After a shareholder vote in May 1995, the company officially came to be known as Worldcom. Corporate Culture Worldcom had an autocratic style of management and followed a top down approach. Each department had its own rules and management style. There was no outlet for employees to express their concerns. Top hierarchy granted compensation and bonus beyond the company guidelines to a select group of individuals based on their loyalty to them. Expense to Revenue Ratio (E/R) Ratio Ebbers was obsessed with revenue growth and insisted on a 42% E/R ratio. He encouraged managers to push for revenue, even if it meant that long term costs would out weigh the short term gains. As business operations declined post the 1st quarter in 2000, CFO Sullivan used the following accounting tactics to achieve targeted performance: 1. Accrual releases: Accounting principles require companies to estimate expected payments from line costs and match them with revenues in the income statement. Throughout 1999 and 2000, Sullivan told staff to release accruals which too high compared to the relative cash payments. Over a 7 quarter period between 1999 and 2000, Worldcom released $3.3 billion worth of accruals. 2. Expense capitalization: The above tactic could not be used by the end of 1st quarter of 2001 as few accruals were left to release. Sullivan devised a creative solution which started identifying costs of excess network capacity as capital expenditure rather than as an operating cost.

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