Worldcom Case

1- What are the pressures that lead executives and managers to “cook the books?”

In the 1990s, the telecommunication was rapidly growing which led WorldCom to adopt the strategy of purchasing small long distance firms with limited geographic service areas and consolidating carriers with large market shares. This was the company’s main key profit. Indeed, by adopting this strategy, WorldCom grew quickly by expanding internationally in South America, West America, Europe and Latin America. As a result of this, WorldCom became the leader in this industry.

- The pressure that Ebbers put on his employees as he wanted by the number one stock in Wall Street by increasing the revenue. He demanded his employees to increase the revenues even if the long-term cost exceeds the short-term profit. As a result of this demand by Ebbers, executives and managers needed to show increasing in the revenues that they started cooking the books.

- In July 2000, the U.S. Justice Department didn't allow WorldCom to merge with Sprint. Due to the refusal, the company was shocked and faced difficulties to find its way out.

- Also, in 2000, the telecommunication industry began to fall apart as a result of the high competition along with the low demand. As new entrants began to enter the market, this led the prices to decrease further. Due to this, WorldCom faced a higher pressure to increase its revenues. Also. WorldCom struggled to maintain the same level of E/R ratio.

- Moreover, WorldCom was faced by that the company may not be attractive to investors anymore.

- Ebbers, the CEO, threated the seniors mangers by saying that if they didn't increase the revenues, they will lose everything. This has actually encouraged the managers to do whatever it takes in order ton boost the revenues and remain in their jobs.

- Consequently, Sullian find that the only way out is by manipulating with the figures in order to show that company is in a better position.

2- What is the boundary between earnings smoothing or earnings management and fraudulent reporting?

Smoothing earnings is not preferred but in the same time is not an illegal act. It basically make the earnings seems more smooth by reducing the fluctuations. By smoothing the earnings, the net income fluctuations from one period to the next will be less. Indeed, companies practise this due to the fact that investors prefer to pay premium for stocks that are stable in their earnings.

However, fraudulent reporting is an illegal act as managers tend to practise it with the intention to hide and misreport the company’s financial figures and information. It actually misreports amounts and discloses false financial information and figures.

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