Worldcom Case Analysis

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WorldCom Case Analysis 1. Case background and problems to solve: What are the pressures that lead executives and managers to “cook the books”? The source of the pressures came from a company goal of being the “No. 1 stock on Wall Street”, which relied greatly on revenue growth. The more direct causes of the pressures came from a deteriorating E/R ratio (line-cost expenditures to revenues), caused by heightened competition, overcapacity and the reduced demand for telecommunications services caused by economic recession and dot-com bubble collapse. Since E/R ratio was WorldCom’s most important performance indicator following factors, and it was closely monitored by analysts and industry observers, WorldCom’s top managers, with Ebbers at the core, thinking more about their own personal benefits than the company’s long-term development and its impact on stakeholders and the society at large, hence had great motivation to “cook the books”. 2. Why WorldCom accounting practices can be defined as fraudulent reporting and not mere earnings management? Because the accounting entries were done according to WorldCom’s senior managers’ manipulations and requests, in stead of generally accepted accounting principles and WorldCom’s real operation or financial situations. And the accounting treatment WorldCom’s managers were using were not supported within the accounting guidelines, while earnings management is conducted within the accounting guidelines. 3. Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom? First of all, WorldCom’s organizational structure was very complicated due to its growth model (growing through acquisition, without a very effective, efficient and systematic acquisition mechanism in place): information

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