fiasco report
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Fiasco Report
WorldCom
Founded in 1983 in Mississippi Bernard Ebbers appointed CEO in 1985 Company went public through merger with Advantage
Companies Inc. in 1989
“To be the most profitable, single-source provider of communication services to customers around the world” 1998 Mission Statement
Growth Through Acquisitions
Aggressive growth through acquisitions strategy Between 1991 & 1997 completed roughly 65
acquisitions worth over $60 Billion However, accumulated $40 Billion in debt
Ebbers was able to take stock price from pennies per share to well over $60 per share by 1997
Beginning of the end
Financed acquisitions mainly through shares of soaring WorldCom stock Bull Market of late 1990’s Wall Street had an extremely positive opinion
On the inside, an inconsistent M&A strategy was starting to crumble the company I.E. Customers calling for help being told that they weren’t
customers
Results Controls
WorldCom’s top management was rewarded primarily based on the firm’s stock performance, representing a result control to align the interests of top management with the company itself
Cultural Controls
WorldCom’s corporate culture was focused on “teamwork” and encouraged employees to be a strong “team player” with the purpose of reducing dissenting opinions
WorldCom’s mission statement of “Our objective is to be the most profitable, single-source provider of communication services to customers around the world” was used to shape their culture
Personnel Controls
Decision making was centralized to top management resulting in a personnel control
8 of the 11 board of directors were considered independent
Action Controls
WorldCom’s audit committee consisted of 4 people
Stock option compensation for senior management
Top management provided revenue and earnings growth guidance to capital market investors
Missing Controls
Lack of controls prohibiting top management from collateralizing their stock holdings for personal finance purpose
Lack of a financial decision control mechanism to object any unrealistic decisions made by the CEO
Missing Controls
Lack of controls prohibiting personal financial dealings between top management and board of directors
Lack of controls enforcing regular audit committee meetings and accounting system learning
Lack of controls between the equity research function and investment banking function
Missing Controls
The existing control system was not comprehensive enough and was lacking some necessary controls
There needs to be a combination of action, result, and people controls in place in order to supplement each other and avoid “side effects” from a specific control
Fall of WorldCom
Can be described in three parts:1. Corporate strategy of acquisition without
integration2. The use of loans to executives3. the threats to corporate governance based on the
friendliness of the executives and lack of “at-arm’s-length” dealings
Corporate strategy of acquisition without
integration Over 6 years spent $60 billion on 65 companies
amassing $41 billion in debt WorldCom used a liberal approach to accounting:
From the acquired companies they would capitalize operating expenses, recognize all the revenue thus gaining profits from the acquisition to boost share price
This came to an end when the US government blocked the massive acquisition of Sprint and so they had to “cook” the books even further
“Sweetheart” Loans to Executives
Bernie Ebbers had a passion for creating enterprise and so create other companies besides WorldCom.
He levered his share in WorldCom stock to build these companies.
The stock began to drop and so the bank required Bernie to put up for a margin call, essentially to cover what was lost
Didn’t have enough in personal assets and the board did not want him selling his shares dropping the share price even lower.
Authorized $341 million in loans to Bernie
Conflicting Interests
At the time there was no legislation in place that strictly enforced the impartiality of analysts Jack Grubman was the key telecom analyst and seen as a top player on
Wall Street
At the time, his intimate relationship with WorldCom execs was seen as good relationship management
Additional complications arose with the oft-maligned accounting firm Arthur Andersen
Discovery of the Fraud
Internal audit department head Cynthia Cooper received complaints of bad debt accounting being taken from business segments
The audit team began working late at night so as not to be noticed by executives
Only through backdoor access to the system were the improperly capitalized items discovered
The discoveries were reported to newly appointed audit firm KPMG and on June 25th, 2002 WorldCom announced their earnings inflation
Recommendation
Because of the WorldCom fiasco, along with what happened at Enron, Tyco and others the Sarbanes-Oxley Act was enacted to help shield against fiascos from happening again.
Some key points from that include Accountability of executives Protection for whistle blowers Shield against analysts conflict of interest
Recommendation
Some additions to the act that we thought would be beneficial: A more morally centered mission statement to give
employees a moral sense in the company Teamwork that is more focused on ethics through
Team charter Sense of community
Deliberate role modeling giving new employees a sense of the values of the organization, which would have been laid out
Thank You
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