Worldcom Case Summary

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Timeline of events:
• WorldCom was founded in 1983 by Bernie Ebbers and it began as a re-seller of long-distance telephone services.
• WorldCom bought around 50 other small long-distance firms, the Mississippi-based company set its sights on MCI, America’s second-biggest long-distance carrier, in 1997.
• WorldCom outbid its competitors with help of high share price, securing a $37 billion merger in September 1998.
• Mr Ebbers tried to buy Sprint, another American rival two years later but could not complete the deal owing to antitrust regulators on both sides of the Atlantic.
• Mr Ebbers resigned as chief executive in April 2002 with WorldCom’s share price tumbling, and a probe by regulators taking place.
• Soon after, the discovery of massive
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This lawsuit blames WorldCom of unfairly exploiting the telecoms regulations at the expense of its competitors.
Detailed Analysis:
The WorldCom case has become a kind of typical case of corporate governance failures. The world’s second largest telecommunications company WorldCom after the disclosure of massive accounting irregularities, filed for bankruptcy in the federal court in Manhattan in 2002. It provides a genuine case study in the failure of corporate governance and suggests a number of lessons in how to avoid its repetition.
The fraud within WorldCom consisted of a number of so called “topside adjustments” to accounting entries to falsify declining earnings. These “adjustments” were improper drawdowns of reserves accumulated from its acquisition program and other sources, false or improper capitalization of costs which should have been expensed. It was a classic case of “cooking the books”.
The judge handling the SEC proceedings in New York reported that the company overstated its income by approximately $11 billion. It also apparently overstated its balance sheet by approximately $75 billion which in turn caused losses in shareholder value of as much as $250 billion, a significant amount of which in employee retirement
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They have produced a flood of various regulatory and legislative responses.
Along with the Sarbanes-Oxley Act of 2002 and other similar regulations issued by the SEC now the New York Stock Exchange and the NASD both compel corporate CEOs and CFOs to certify the accuracy of financial statements filed with the SEC. This requires listed companies to genuinely adopt corporate governance guidelines or codes of ethics which specifically address the conduct of senior management, directors or officers. It forbids corporations to extend unnecessary credit to their directors or officers and also provides for forfeiture of profits and bonuses from sale of company stock if in case restatements have been made solely as a result of “misconduct” in financial reporting. It also requires that all members of audit, compensation and nominating or governance committees should be independent and also that at least one member of the audit committee must have accounting expertise. These regulations also impose stricter supervision over outside auditors for proper auditing
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