Behind Closed Doors at WorldCom: 2001

By Zekany, Kay E.; Braun, Lucas W. et al. | Issues in Accounting Education, February 2004 | Go to article overview

Behind Closed Doors at WorldCom: 2001


Zekany, Kay E., Braun, Lucas W., Warder, Zachary T., Issues in Accounting Education


ABSTRACT: WorldCom was a large telecom company that enjoyed an almost meteoric rise during the 1990s but ran into trouble in the early 2000s. 2001 was particularly difficult. This case gives future generations of accountants the opportunity to study the largest accounting scandal in history from an internal financial accounting perspective. To the extent possible, this case uses the actual "voices" of participants to gain an understanding of their viewpoints and motives. We get a chance to see some participants at their best and others at their worst.

While our primary focus throughout this case is on the financial accounting issues, we also briefly touch on some of the safeguards available in preventing accounting fraud: internal controls, internal audit, external audit, and the Audit committee. Throughout this case, you should ask yourself, "How would I respond if I were the corporate decision maker?"

**********

INTRODUCTION

The year 2001 was a tumultuous time in the telecom industry. In the midst of the turbulence, WorldCom's Board of Directors explained in the "Report of Investigation" the market conditions existing in 2001:

    The number of competitive local telephone companies in operation
    dropped to 150 from 330 the previous year, and long distance
    carriers lost pricing power and market share to the regional Bell
    and other local telephone companies. Many companies had entered the
    market for Internet services in the late 1990s, and the resulting
    expansion in network capacity led to a glut in the market.
    (Beresford et al. 2003, 51)

At the same time, WorldCom's Chief Executive Officer, Bernard J. (Bernie) Ebbers, along with Mike Armstrong, Chief Executive Officer at AT & T, was at the top of Fortune magazine's list of "People to Watch 2001." This was true even though, according to Fortune, "Both run telecom companies with struggling consumer long-distance operations that are dragging down the company stock" (Birnbaum et al. 2001, 12). Unbeknownst to Fortune, there were other reasons to watch Bernie Ebbers and his management team that year ... like a hawk.

BACKGROUND

WorldCom Is an Important Company

John Sidgmore, then a top WorldCom executive, lauded his company's achievements to the Committee on Financial Services of the U.S. House of Representatives: "We play a vital role in America's telecommunications infrastructure:

* WorldCom is a strong, innovative company with tremendous assets. We have annual revenues of more than $30 billion, and even after our recent layoffs, we have more than 60,000 employees.

* WorldCom has more than 20 million customers. On the residential side, our MCI phone service handles 70 million phone calls every weekend alone. And, tens of thousands of businesses depend on our services to support their mission-critical applications.

* WorldCom is the largest Internet carrier in the world. Our operations provide Internet services to some 100 countries on six continents.

* WorldCom is a provider of network services for critical applications for the United States Government. These applications include the provision of customer service to 80 million Social Security beneficiaries, air traffic control applications for the Federal Aviation Administration, network management for the Department of Defense, and critical data network services for the U.S. Postal Service. In addition, WorldCom provides long distance voice and data communications services for the House, the Senate, and the General Accounting Office. Our company provides those same kinds of services for virtually every government agency ... In addition, WorldCom provides support for law enforcement and homeland security agencies, as well as agencies concerned with national security" (Sidgmore 2002).

"In other words," Sidgmore (2002) concluded, "WorldCom is a key component of our nation's economy and communications infrastructure. …

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