Worldcom: What Went Wrong?

WorldCom: What went wrong?

Introduction

In June of 2002, a group of courageous WorldCom employees uncovered and began to expose a series of fraudulent accounting entries that would ultimately lead to the largest bankruptcy filing in the history of the United States. Around the world today, even a brief mention of the name ‘WorldCom’ will cause most business minded folks to instantly think ‘accounting scandal’.

The fact is that the fraud uncovered within the WorldCom scandal was significant enough that it itself has truly become representative of the very definition of the phrase ‘accounting scandal’, which according to Wikipedia is defined as; “political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates.” (wiki.com, 2012) WorldCom was guilty of nearly all of the above!

This case study will breakdown the events associated with the WorldCom scandal while pointing out some specific breaches of the Generally Accepted Accounting Principles. Finally, a few key recommendations will be shared relative to preventative actions that can be taken by companies to avoid a recurrence of these scandalous events.

The Mistake

Depending upon the source that one reads the total accounting fraud that was committed at WorldCom can be understood to range from seven billion and up to twelve billion or more. Regardless of which source is acknowledged, the fact is that this scandal was significant. In effect, senior level leadership was so motivated to demonstrate success with their acquisitions that they were willing to ‘fudge’ accounting numbers in order to show positive results. In essence, the mistake can be described as accounting fraud that was accomplished in two ways:

• Booking ‘line costs’ (interconnection expenses with other telecommunication companies) as capital on the balance sheet instead of expenses.

• Inflating revenues with bogus accounting entries from "corporate unallocated revenue accounts". (wiki.org, 2012)

The Cause

Wherever there is fraud there is typically a form of greed lurking nearby. For WorldCom, senior leaders were determined to show positive results quickly, even if it meant bending the rules. In fact, this is exactly what occurred at WorldCom, a series of blatant decisions to disregard accounting principles that went so far as to be illegal. Of course, the question becomes; how can inaccurate