The string of accounting scandals in corporate America in the past decade has contributed to public distrust in corporate operations and created an environment in which financial reporting is viewed with more suspicion than before. Together with Enron, WorldCom case has become a classical tale of accounting fraud.
Chris Ayres’ article entitled “Corporate America hit by Biggest Scandal in History” in The Times of London focuses on the accounting fraud at WorldCom Inc., a telecommunications giant. In June 2002 the world learned that the telecom company had overstated its profits by approximately $3.85 billion in five quarters. The amount of overstatement set a record in the US corporate history, doubling the previous overstatement of Rite Aid and was expected to lead to the predictable demise of the company already burdened with $30 billion of debt.
The
news shook the whole world as trading in the London Stock Exchange dropped about 4% on the next day,
June 26. Following accounting scandals at Tyco International, Kmart, Enron and Global Crossing, the
WorldCom disclosure gave reasons to talk about “a crisis of confidence in US capitalism” (Ayres,
2002).
The accounting scandals ended deplorably for WorldCom management, including chief financial officer, Scott Sullivan and Bernie Ebbers, ex-chief executive officer. Although Ebbers who had borrowed 6 million from the company’s funds to cover his personal debts had already been ousted, the disclosure was widely regarded as a reason to expect him to be interrogated. Ebbers was described as one of the “most charismatic chief executives” who “still drives a tractor on his brother’s cattle ranch and takes Sunday school classes at a Baptist church in Mississippi” (Ayres, 2002). The accounting scandal surely disrupted his peaceful retirement and returned him to the reality of his corporate stance at WorldCom that proved so disastrous for the company.
The accounting problems at WorldCom proved to be consistent and far-ranging. They remained hidden, perhaps with the help from the company’s auditors that happened to be the same Arthur Andersen accounting firm that audited the notorious Enron. The “massive fraud” at WorldCom was uncovered by the team that performed an internal investigation. Unlike the intricate schemes employed at Enron, WorldCom was reported to perpetrate its fraud by using a very simple technique: the company “booked many of its day-to-day expenses as capital expenditure” (Ayres, 2002). As a result, WorldCom’s expenses that should have surfaced in the income statement instead ended on the balance sheet, which led to the understatement of expenses and resulting overstatement of the bottom line. In this way the company continued to fool investors for a few quarters.
Scandals like WorldCom truly caused shock in the global financial community. To think that a large US company operating in a nation that prides itself on its strict accounting scandals was able to get away with the fraud of this scale is indeed scary. The WorldCom scandals contributed to the strengthening of the US accounting standards since that time, reminding policy-makers of the constant need to monitor corporate activities.
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References: Ayres, C. (2002, June 26). Corporate America hit by Biggest Scandal in History. The Times of London. Retrieved December 13, 2005 from http://www.commondreams.org/headlines02/0626-01.htm.