Caselette No.

4 - Identifying the Absence or Weaknesses of Internal Controls over Financial Reporting at WorldCom The facts: - WorldCom is a telecommunications company which was lead by CEO Bernard Ebbers and CFO Scott Sullivan. - In 1 ! WorldCom was not meetin" Wall Street#s revenue and earnin"s e$pectations! and it appeared that the comin" year would produce more bad news. - %he CFO ar"ued &or settin" realistic tar"ets. 'owever! the CEO insisted that the company needed double di"it "rowth! and pushed &or a""ressive tar"ets. %hese a""ressive tar"ets were not supported by historical data or strate"ic assessments. - In order to meet these tar"ets! WorldCom be"an boostin" its revenue throu"h a wide ran"e o& accountin" measures! includin" drawin" down on reserves set aside &or e$penses. %he economic situation at the time was not ta(en into account when implementin" these a""ressive accountin" measures. Other similar companies were reportin" declinin" revenues. - It was identi&ied that the mana"ement who were ma(in" the a""ressive accountin" decisions! were also postin" the )ournals to the "eneral led"er! and reviewin" and approvin" the reportin". - *ressure was placed on personnel who did not support the a""ressive tar"ets. - + "reat deal o& &ocus was put on ,team wor(- and bein" a stron" ,team player-! which is said to have been a strate"y to reduce dissentin" opinions! eventually leadin" the or"anisation to &ollow a ,"roupthin(- attitude. - In .///! the telecommunications industry entered a downturn and WorldCom#s a""ressive "rowth strate"y su&&ered a serious setbac(. 'owever! due to the accountin" measures used! by 01 in .///! the company mana"ed to meet the Wall Street e$pectations. - Finally! WorldCom#s stoc( price started to plummet. - Be&ore the release o& 01 results! .//.! the company#s revenue was declinin"! ma(in" the tas( o& showin" revenue "rowth throu"h accountin" maneuvers nearly impossible.

- %he disastrous &irst 2uarter results were released! and the CEO Bernard Ebbers! was as(ed to resi"n. - Be"innin" modestly in mid-year 1 and continuin" at an accelerated pace throu"h 3ay .//.! the company 4under the direction o& Ebbers 4CEO5 and Sullivan 4CFO55 used &raudulent accountin" methods to mas( its declinin" earnin"s by paintin" a &alse picture o& &inancial "rowth and pro&itability to prop up the price o& WorldCom#s stoc(. - %he &raud was accomplished primarily in two ways6 7nderreportin" line costs 4interconnection e$penses with other telecommunication companies5 by capitalisin" these costs on the balance sheet rather than properly e$pensin" them. - Over the course o& its operations! WorldCom has success&ully ac2uired a total o& 89 companies! o& which 11 were ac2uired between 1 1 and 1 :! and in that course has accumulated around ;<1 billion in debt. By the time it declared ban(ruptcy in .//.! the or"ani=ation had a combined loss o& ;:1.: billion. - In .//.! a small team o& internal auditors at WorldCom wor(ed to"ether! o&ten at ni"ht and in secret! to investi"ate and unearth ;1.> billion in &raud. Shortly therea&ter! the company#s audit committee and board o& directors were noti&ied o& the &raud and acted swi&tly6 Sullivan was &ired! +rthur +ndersen withdrew its audit opinion &or .//1! and the 7.S. Securities and E$chan"e Commission 4SEC5 launched an investi"ation into these matters on ?une .8! .//.. - By the end o& .//1! it was estimated that the company@s total assets had been in&lated by around ;11 billion. - On ?uly .1! .//.! WorldCom &iled &or Chapter 11 Ban(ruptcy *rotection. Identify internal control weaknesses/absences from the above caselette.