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Caselette No. 4 - Identifying the Absence or Weaknesses of Internal Controls

over Financial Reporting at WorldCom

The facts:

- WorldCom is a telecommunications company which was lead by CEO Bernard Ebbers andCFO Scott Sullivan.

- In 1! WorldCom was not meetin" Wall Street#s revenue and earnin"s e$pectations! and itappeared that the comin" year would produce more bad news.

- %he CFO ar"ued &or settin" realistic tar"ets. 'owever! the CEO insisted that the companyneeded double di"it "rowth! and pushed &or a""ressive tar"ets. %hese a""ressive tar"ets were notsupported by historical data or strate"ic assessments.

- In order to meet these tar"ets! WorldCom be"an boostin" its revenue throu"h a wide ran"e o&accountin" measures! includin" drawin" down on reserves set aside &or e$penses. %he economicsituation at the time was not ta(en into account when implementin" these a""ressive accountin"measures. Other similar companies were reportin" declinin" revenues.

- It was identi&ied that the mana"ement who were ma(in" the a""ressive accountin" decisions!were also postin" the )ournals to the "eneral led"er! and reviewin" and approvin" the reportin".

- *ressure was placed on personnel who did not support the a""ressive tar"ets.

- + "reat deal o& &ocus was put on ,team wor( and bein" a stron" ,team player! which is saidto have been a strate"y to reduce dissentin" opinions! eventually leadin" the or"anisation to&ollow a ,"roupthin( attitude.

- In ///! the telecommunications industry entered a downturn and WorldCom#s a""ressive

"rowth strate"y su&&ered a serious setbac(. 'owever! due to the accountin" measures used! by0 in ///! the company mana"ed to meet the Wall Street e$pectations.

- Finally! WorldCom#s stoc( price started to plummet.

- Be&ore the release o& 01 results! //! the company#s revenue was declinin"! ma(in" the tas(o& showin" revenue "rowth throu"h accountin" maneuvers nearly impossible.

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- %he disastrous &irst 2uarter results were released! and the CEO Bernard Ebbers! was as(ed toresi"n.

- Be"innin" modestly in mid-year 1 and continuin" at an accelerated pace throu"h 3ay //!the company 4under the direction o& Ebbers 4CEO5 and Sullivan 4CFO55 used &raudulent

accountin" methods to mas( its declinin" earnin"s by paintin" a &alse picture o& &inancial "rowthand pro&itability to prop up the price o& WorldCom#s stoc(.

- %he &raud was accomplished primarily in two ways6 7nderreportin" line costs4interconnection e$penses with other telecommunication companies5 by capitalisin" these costson the balance sheet rather than properly e$pensin" them.

- Over the course o& its operations! WorldCom has success&ully ac2uired a total o& 89 companies!o& which 11 were ac2uired between 11 and 1:! and in that course has accumulated around; billion in &raud. Shortly therea&ter! the company#s auditcommittee and board o& directors were noti&ied o& the &raud and acted swi&tly6 Sullivan was &ired!+rthur +ndersen withdrew its audit opinion &or //1! and the 7.S. Securities and E$chan"eCommission 4SEC5 launched an investi"ation into these matters on ?une 8! //.

- By the end o& //! it was estimated that the company@s total assets had been in&lated by around;11 billion.

- On ?uly 1! //! WorldCom &iled &or Chapter 11 Ban(ruptcy *rotection.

Identify internal control weaknesses/absences from the above caselette.