Abc Consulting, Inc. Case Study

Executive Summary

Overview of Assignment

We are senior consultants from ABC Consulting, Inc., and we have the opportunity to share our team's case study on the WorldCom fraud. This report and presentation will be presented to CSB Systems, and will replace the traditional interview process. CSB Systems is in the process of acquiring a new telecommunications company, called TAT. Because WorldCom was part of the telecommunications industry, we felt it would be appropriate to present WorldCom as our case study.

Background

WorldCom, initially named Long-Distance Discount Services, got its start in a Mississippi coffee shop in 1983. Led by Bernard Ebbers, partners drew out their idea on a napkin for a long distance company that would eventually grow into a telecommunications giant. WorldCom attained its' top-ranking status through a series of more than 60 mergers. While WorldCom's expansion seemed extraordinary to the public, the future proved the success to be short-lived. WorldCom crumbled in June of 2002 when the company confessed to inflating earnings by $3.8 billion. The company filed for bankruptcy the following month. The investigation that followed led to an estimated total of $11 billion in fraud, the largest in U.S. history.

Observations

During the course of research and investigation, we made observations that were critical to the fraud/scandal in four primary areas. The areas are as follows:

* Corporate Culture

- The environment was one in which top management could run the organization unchecked

* Internal Control

- Internal controls, if present, were ineffective and circumvented at every level

* Key Management Personnel and Related Parties

- Senior management and other key employees were unethical and not held accountable for their actions

* Accounting Practices

- The accounting practices implemented at WorldCom allowed management to manipulate earnings to meet preferred numbers and meet Wall Street expectations

Recommendations

To prevent this type of fraud from happening in the future, we have made some recommendations that we believe to be beneficial. A brief list of the recommendations are:

* Implementation of an effective system of internal controls

* Fraud Awareness and Prevention training for all employees

* Code of Ethics read and signed annually by all employees

* Ethics Hotline should be put into operation and monitored by an external source

* Implement a Zero Tolerance Fraud Policy and a Conflict of Interest Policy

* More effective hiring policies that incorporate background checks

* Increased involvement from the Board of Directors and Audit Committee members

Background

In 1984, no one would have imagined that a small, Mississippi-based long distance company, by the name of Long-Distance Discount Services, would one day grow into the giant known as WorldCom, the second-largest long distance carrier in the U.S. WorldCom achieved its top-ranking, telecommunication status through a series of more than 60 mergers and acquisitions (The WorldCom Story). However, these 'mega-deals' were not enough for WorldCom CEO, Bernie Ebbers, and in 1998, WorldCom bought MCI Communications for $37 billion, marking the largest takeover in American corporate history at that time (Beresford, 5). By 2001, WorldCom owned one-third of all data cables in the U.S., and was responsible for handling 50% of all United States Internet traffic. While WorldCom's growth and accomplishments seemed impressive to the public, the future proved that they would be short-lived.

In late 1999, the Internet and telecom industries experienced halted growth, which resulted in WorldCom's stock price falling. To combat against the fall, Ebbers borrowed $400 million to pay the margin call and ward off any immediate crisis (The WorldCom Story). Furthermore, at the instruction of Chief Financial Officer, Scott Sullivan, WorldCom accountants Troy Normand, Betty Vinson, and David Myers began reducing reserve accounts held for liabilities and moved this money to the revenue line of the financial statements (Beresford, 11). Manipulating reserves did not produce the earnings that Ebbers had hoped for, so in 2000, WorldCom began classifying operating expenses as long-term capital investments (MCI). These stunts, along with one other false journal entry for $500 million in computer expenses, changed WorldCom's losses into $1.38 billion in profits for 2001. Like all schemes, WorldCom came to and end on June 25, 2002, when the company admitted to inflating its earnings by $3.8 billion. WorldCom filed for bankruptcy in July 2002 (Beresford, 39). Initially, it was tips to the internal audit team that spurred the WorldCom investigation that would later lead to an estimated total of $11 billion in corporate fraud, the largest in U.S. history (Enron and Beyond and Karim). Former CEO, Bernie Ebbers, and former CFO, Scott Sullivan were each charged with fraud and violating the securities laws. In April 2004, WorldCom emerged from bankruptcy and changed its name to MCI. On January 6, 2006, MCI was acquired by Verizon Communications (MCI).

Observations

During our investigation, we uncovered numerous "red flags" that signaled fraud could be occurring in the organization. We found that WorldCom had implemented many policies and procedures that hindered the discovery of fraud. These policies and procedures also allowed the fraud to continue for more than three years to become the largest fraud in US history. During the investigation, we noted four (4) observations that were critical to the scandal. The four (4) observations are:

1. Corporate Culture

2. Internal Control

3. Key Management Personnel and Related Parties

4. Accounting Practices

Each of the above listed observations played

...