Research Proposal on "Worldcom Mci"

Research Proposal 10 pages (2813 words) Sources: 4 Style: APA

[EXCERPT] . . . .

Worldcom-Mci

Case Analysis - WORLDCOM-MCI

The age of the internet - the age of the multinational corporations - the age of record high profits and bankruptcies

The modern global context is filled with examples of greed, deceit and manipulation. And more sadly, these affect the business communities, the organizations we trust to provide our commodities, services, jobs or the organizations in which we invest our life savings. One may tend to believe they have witnessed all these in the case of Enron's fraud and bankruptcy, but it may not be entirely true. While Enron was indeed one of the largest bankruptcies of the twenty-first century, it was only the second - the largest was that of telecommunication's giant WorldCom.

Founded in 1983 as a regional company, WorldCom achieved impressive successes and became able to compete with at&T. The primary strategy at the basis of their growth has been the acquisition of various organizations activating within the same industry. Today however, founder Bernard Ebbers is serving a 25 years sentence and what is left of the organization, has lost most of its identify and has itself been purchased by a telecommunications operator.

The following lines attempt to shed some light into the events that occurred throughout the company's 25 years of existence, with emphasis on their fraud and bankruptcy, to culminate with the quiet present.

2. WorldCom

The foundation name of WorldCom had initially been LDDS, or Long Distance Discount Services Inc. And it was established in 1983 in Mississippi. The selected CEO was Bernard Ebbers. LD

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DS commenced as a small organization, offering communication services to regional customers. Their tremendous growth was mostly due to the strategic mergers and acquisitions of several smaller companies, such as the merger with Advantage Companies Inc. In 1989, Metromedia Communications Corp. In 1993, IDB Communications Group Inc. In 1994 or the MFS Communications Company in 1996 (Cooper, 2008).

As time went by, the company continued to merger with other organizations, the most important process being the acquisition of MCI in 1998. The deal was signed for $37 billion and the newly formed organization was named MCI WorldCom. In June 1999, the WorldCom stock was being traded at a value of $64, making Bernard Ebbers a billionaire and WorldCom the "darling of the New economy" (Moberg and Romar, 2002). By 2001, they had become the largest provider of internet services across the United States and the second largest company offering long distance communication services.

3. Commencement and Causes of Problems

The situation created at WorldCom has been debated for several years now and all the information have yet to be put in place. Whereas the bankruptcy audit revealed some of the causes, the post-bankruptcy audit revealed another take on the matter. As more and more former and current employees come front to share their experiences, it is quite possible that new pieces of information will arise.

A study conducted immediately after the commencement of the bankruptcy procedures by the Markkula Center for Applied Ethics revealed three primary causes, all reflecting poor ethical behaviors. They refer to:

The growth strategy based on mergers and acquisitions

The granting of loans to senior officers, and the lack of a strong hand to lead the organization

Most of WorldCom's growth is based on an aggressive strategy of corporate acquisitions, namely 65 of its most fruitful purchases. But despite the expected benefits, the newly acquired firms failed to meet the financial objectives that had been set. Between 1991 and 1997 for instance, WorldCom had spent an estimated $60 billion for purchasing other companies, but the results of these operations had materialized in a $41 billion debt (Romero and Atlas, 2002). This is most likely due to the challenges encountered in integrating the newly acquired companies. Seeing that WorldCom had been the combination of 65 companies, the management failed to organize all components into a single unified unit, in which companies and people could work together and increase the shareholder and customer value.

Also, a most important challenge was that of properly implementing the generally accepted accounting practices (GAAP). Seeing that the 65 companies brought a baggage of financial statements, account receivables and debts, the accounting team at WorldCom failed to address these accounting problems. In addition, their approach to financial statements was a liberal one, meaning that they took the liberty to make profits seem bigger than they were in reality. For instance, the WorldCom accountants would register within a quarter the millions in acquired assets, and simultaneously, they also "included in this charge against earnings the cost of company expenses expected in the future. The result was bigger losses in the current quarter but smaller ones in future quarters, so that its profit picture would seem to be improving" (Eichenwald, 2002).

Another problem which should have captured the attention of the WorldCom management was the handling of the account receivables. The company did not implement an official direction in this instance and they simply chose to ignore the customers that were not paying their debts to the organization. This generated negative impacts as the management was unaware of the extent of the customer debts and foremost, without the proper information, it neglected to constitute adequate provisions. Foremost, since they did not know about the account receivables and did not constitute provisions, they were able to report higher profits than the real ones (Sender, 2002).

The process of granting senior executives corporate loans has also revealed poor ethical norms and contributed to the WorldCom bankruptcy. When the stock price began to decrease, Ebbers requested a corporate loan to pay for his margin calls. As his collateral was insufficient, the board granted him a record high $341 million loan. The strategy would have been a useful one had the stock increased, but this did not happen. Similar benefits were offered to other executives, such as CFO Scott Sullivan or the accountants at Arthur Andersen, the audit organization employed by WorldCom at that stage.

And these services were bilateral as both CEO and CFO received significant incentives and rewards from Jack Grubman, telecommunication analyst at Salomon Smith Barney. The services were offered as rewards for the inside information received from Sullivan and Ebbers, based on which Grubman could make suggestions to buy or purchase the WorldCom stocks. However, most of the information offered to the analyst was manipulated and aimed to increase the sale and price of the corporate stock. At these times, the conflicts of interest and the breaking of the ethical rules was loosely regarded by the players as a synergy. By March 2002 however, the WorldCom stock had fallen by 90% and Jack Grubman wrote a mea cupla letter to the misinformed investors (Moberg and Romar, 2002).

4. The Scandal

February 2002 was a turbulent month for WorldCom CEO Bernard Ebbers, who saw himself forced to resign, after the financial problems were revealed to the board by Cynthia Cooper. The internal auditor pointed out various misleading entries in financial statements, which were aimed to conceal a misallocation of nearly $4 billion in corporate expenses and as such misguide the investors.

The first signs of a problem within WorldCom were made public in late June, 2002, when the company officials recognized a problem in improperly accounting more than $3.8 billion of company expenses. On a Sunday July, the company failed for bankruptcy procedures, but they still maintained their optimism. For instance, Michael K. Powell, the chairman of the Federal Communications Commissions stated: "I want to assure the public that we do not believe this bankruptcy filing will lead to an immediate disruption of service to consumers" (Romero and Atlas, 2002). Foremost, since the bankruptcy would spear the company from $2 billion payments in interest rates, they hoped of benefiting from additional financial resources in the future. The declared bankruptcy did not impact the WorldCom subsidies in Mexico and Brazil.

The officials at WorldCom also ensured their customers that the organization would continue to operate and foremost, they had already received financing promises from banking institutions. Their future ventures revolved around a process of corporate restructure and reorganization, from which they hoped to emerge as a stronger company, said John Sidgmore, chief executive of WorldCom, quoted in a New York Times article by Simon Romero and Riva Atlas.

The month following these statements however, more financial mistakes were revealed and CFO Scott Sullivan was fired. Financial controller David Myers resigned. SEC (Securities and Exchange Commission) failed fraud accusations against WorldCom and the Department of Justice commenced their investigation. The most important players in the fraud, Bernard Ebbers and Scot Sullivan believed that their quick replacement with integrant employees would help redeem the affected image of WorldCom. Therefore, an audit was to be conducted under the supervision of Nicholas deB. Katzenbach and Dennis R. Beresford - the two new members of the WorldCom board.

Even before the bankruptcy had officially been declared, WorldCom's stakeholders tried to limit their losses by preventing the organizations' further access to resources. A court decision in this instance… READ MORE

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Quoted Instructions for "Worldcom Mci" Assignment:

“

This is the case to be analyze

WORLDCOM-MCI

Bernard Ebbers became very wealthy from the rising price of his holdings in WorldCom*****s stock. However, shortly after the MCI acquisition in 1998, the telecommunications industry entered a downturn and WorldCom*****s growth strategy suffered a serious blow when it was forced to abandon its proposed merger with Sprint in late 2000. By that time, WorldCom*****s stock was declining and Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses ( Timber and yachting, among others). During 2001, Ebbers persuaded WorldCom*****s board of directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls. The board hoped that the loans would avert the need for Ebbers to sell substantial amounts of his WorldCom stock, as his doing so would put further downward pressure in the stock*****s price. However, this strategy ultimately failed and Ebbers was ousted as CEO in April 2002 and replaced by John Sidgmore, former CEO of UUNET Technologies, Inc.

Beginning in 1999 and continuing through May 2002, the company (under the direction of Scott Sullivan(CFO), ***** Myers (controller) and Buford *****buddy***** Yates (director of general accounting) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom*****s stock.

The fraud was accomplished primarily in two ways:

1.- Underreporting *****line cost***** (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them.

2.-Inflating revenues with bogus accounting entries form *****corporate unallocated revenue accounts*****.

Eugene Morse, an internal auditor at WorldCom reporting to Cynthia N cooper, uncovered approximately $3.8 billion of the fraud in June 2002 during an examination of capital expenditures. Cynthia Cooper subsequently alerted the company*****s new auditors, KPMG (who had replaced Arthur Andersen , WorldCom*****s external auditors during the fraud) and the chairman of the audit committee, and she has been widely credited as having uncovered the fraud at WorldCom. Shortly thereafter, the company*****s audit committee and board of directors were notified of the fraud and acted swiftly: Sullivan was fired , Myers resigned. Arthur Andersen withdrew its audit opinion for 2001, and the U.S. Securities and Exchange Commission (sec) launched an investigation into these matters on June 26,2002 (see accounting scandals). By the end of 2003, it was estimated that the company*****s total assets had been inflated by around $11 billion.

Major players: Auditing Firm- Arthur Andersen, Bernard Ebbers

-------------------------------------------------------------SPECIFICATIONS ABOUT THE BODY OF THE PAPER

Developing a Case Study

1. Collecting data about the case.

The study undertaken for this course is to highlight failure of ethical behavior of Company CEOs. The collected data can start for the CEO coming to power at the Company and how over time their behavior became more erratic or cunning depending on your point of view. Data could result from a combination of methods, including documentation (applications, histories, records, etc.), questionnaires, interviews and observation.

2. Data is organized into an approach to highlight the focus of the study.

Data, for the purposes of this class, could be organized in a chronological order to portray how the decline of the CEO/Company came about. Discussion may include the results and consequences of unethical.

3. A case study narrative is developed.

The narrative is a highly readable story that integrates and summarizes key information around the focus of the case study. The narrative should be complete to the extent that it is the eyes and ears for an outside reader to understand what happened regarding the case.

4. Case studies might isolate any themes or patterns.

For the purposes of this course, the case studies deal with large Corporate entities. The analysis report could review the theme/pattern of unethical behavior, causes of unethical behavior, the results of the actions of the CEO, CIO, CFO, or other controlling officers.

The case study report could point out commonalities (i.e. personality traits) that led major players to engage in corrupt behavior. Discussion could also reference how the major player(s) was/were dealt (i.e. penalty, criminal liability, civil liability), or how the Company sought to prevent a reoccurrence of malfeasant behavior.

As with all assignments in which you are referring to someone else's writing, cite any sources used and format them according to the requirements of the APA style guide. This formatting includes, but is not limited to, the following guidelines:

ïƒ˜ Margins - set to one inch

ïƒ˜ Font - 12 pt. Times New Roman, no bold, or underline

ïƒ˜ Title - center above the paper, 12 pt. font (Level A Heading), no bold, underline, or italics

ïƒ˜ Pagination - every page; consists of a header containing a short title for the paper and page number placed in the upper right corner of the page

ïƒ˜ Line Spacing - double space all work including the References Page.

ïƒ˜ Point-of-View - third person, objective; limit perspective to research; no personal opinion or narrative

ïƒ˜ In-text citations - must conform to APA requirements

ïƒ˜ References list - must conform to APA requirements

This assignment is worth more then any other individual assignment. You must format your paper in APA style and must document your sources in APA format. You must discuss the chosen topic with the following goals in mind:

Goals for this assignment

1. To write a research paper.

2. To conduct research on the chosen topic.

3. To provide details of the topic in an organized manner.

4. To provide a chronological perspective of how the issue(s) of ethical behavior, of each Company, came to exists, the consequences of the choices made by major players, and the results or actions to remedy malfeasant behavior.

Grading Criteria

I will grade according to the following:

ïƒ˜ You must thoroughly explain the chronological perspective of how the issue(s) of ethical behavior, of each Company, came to exists, the consequences of the choices made by major players, and the results or actions to remedy malfeasant behavior.

ïƒ˜ APA formatting is required. Minus one letter grade for not using APA format. Please use the template provided.

ïƒ˜ You must have a cover page, introduction, and body with in-text citations,

summary, and reference page.

ïƒ˜ Spelling and grammar count: Use spell-check

ïƒ˜ Use complete sentences

ïƒ˜ Paper needs to be double spaced

ïƒ˜ No extra spaces between paragraphs

ïƒ˜ No fonts larger then 12 point will be accepted

ïƒ˜ No fancy fonts like handwriting, as they are hard to read. Please use a

standard college font like Times New Roman or something similar.

ïƒ˜ Paragraphs must have at least 3 sentences in them but no more then 6.

ïƒ˜ No one sentence paragraphs

ïƒ˜ Use your own words

ïƒ˜ All quotes must be in quotations and with references cited.

ïƒ˜ Do not use large quotes. Tell me in your words and cite your source.

ïƒ˜ You must use at least 3 references. Please use the LRC.

ïƒ˜ You must use citations for every cite, every time you use

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