Worldcomm Question

There is a lot of factors the lead WorldComm's executives to cook the books or perform the aggresive accounting. The main factors is executives self interest,which is Ebbers and his friends.

Based on the case, Ebbers has several unrelated business that he finance with loan secured by his stocks at WorldComm. Thus, from that we can conclude that Ebber's unrelated business' continuity is heavily depends on WorldComm stocks value. We can say that all that Ebbers care is about WorldComm share price or company value and he will do anything to maintain the stock value. That's why he tried to maintain Expense to Revenue(E/R) ratio for 42% even if it costs manipulating its expenses figure.

Second point is that there is poor regulation regarding corporate governance at that time. As we know, Sarbanes Oxley Act only enacted after a few of companies include WorldComm go bankrupt. Thus, during WorldComm time, there is no specific law to govern the company in terms of board of directors composition, external auditors and company's internal control.

Absence of these laws like SOX results in poor corporate governance in WorldComm which leads its executives to easily 'cook the books'. Among the things enacted in SOX is the company now requires to individually certify the accuracy of financial statements, penalties for fraudulent activities is much more severe, increased indipendence of external auditors, and increased oversight of board directors' role. Thus, if only there were such law in place during WorldComm's time, there will be a good composition of BOD, external auditor will be real indipendence, internal auditor power would be better, and Ebbers, will not dare to do just everything he wants. Thus, with all these laws in place, aggresive accounting would not happened.