Term Paper on "Cases in Corporate Governance"

Term Paper 4 pages (1093 words) Sources: 1+

[EXCERPT] . . . .

WorldCom case took the entire telecommunication industry with a storm when the company started a series of acquisitions in the early 1990s.The low margins that characterized the telecommunication industry at that time used to be never enough for the WorldCom CEO Bernie Ebbers. Between 1995 and 2000, the company acquired over sixty communication companies. It then bought MCI for close to $37 billion in 1997 (Kuhn and Sutton,2006). The company then moved into the data communication and internet business and was handling close to half of the U.S. internet traffic as well as half of all the worldwide e-mails.

How the Fraud took place

In 1996, the company's revenue growth slowed down as its stock price started to fall. Tips were first sent to the internal audit team and then several accounting irregularities were discovered in the books of its subsidiary MCI's. SEC then requested that the company provides more information.SEC became suspicious when they realized that while WorldCom was raking in more profits, one of its main rivals AT&T was making loses big time. The internal audit team then investigated the several billions that the company had earlier announced as its capital expenditure and another $500 million that it had in computer expenses (undocumented). Another sum of $2 billion worth of questionable entries was also discovered. The company's audit committee n was then requested to produce the documents to support the capital expenditures but it failed to do so. The controller then admitted to the auditors (internal) that they never followed accounting standards. The company subsequently admitted to have inflated its profits margins by about $3.8 billion over the preceding five quarters. WorldCom then filed for bankruptcy about a month after the process of internal audit began.

WorldCom's Board structure

According to Kirkpatrick & Lockhart's report (2002), WorldCom's Board comprised of 10 members. This comprised of two inside directors as well as 8 independent directors. Six of the board of director members had already served in their respective capacities on the Board from the time of the WorldCom-MCI merger back in 1998.

Stakeholders who were most affected

The stakeholders of the company who were most affected by the fraud are the customers, shareholders, suppliers, vendors, employees as well as customers. According to Akhigbe, Martin and Whyte (2005) the fraud affected also affected institutional investors (owned 44.9% of its shares), creditors and competitors.

Customers

The customers lost some of their money in unfulfilled contracts, shareholders lost their investments, and suppliers lost their products as well as the vendors some of whom ran out of business.

The extent to which ethics be considered part of the solution to prevent future bankruptcies such as WorldCom

Ethics can be considered as part of the solution to prevent future bankruptcies such as WorldCom since from the WorldCom case, it is clear that the company lacked a legal office (Richardson, 2003).The lack of ethics is what caused the wanton misappropriation of the company's funds by the top management (The CEO Ebbers himself ) lacked ethics (Singer,2004).Ethical leadership can therefore be said to be an important strategy for avoiding cases like WorldCom

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