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Vijaya Laxmi
(@admin)
Eminent Member Admin
Joined:11 months  ago
Posts: 8
23/02/2018 2:22 am  

IMA holds an array of events each year – from chapter and council activities to global and national conferences like our Annual Conference & Expo or the Student Leadership Conference. We offer additional learning opportunities through virtual webinars and in-person workshops.

Joint here :  https://www.imanet.org/events?ssopc=1


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shreu30
(@shreu30)
Active Member
Joined:11 months  ago
Posts: 4
02/03/2018 9:02 pm  

WorldCom: Largest Corporate Scandal

On 15th March 2005, Bernie Ebber's life turned upside down. The man who owned a private jet, yacht clubs, had an extravagant lifestyle now had to face the four walls of  prison. What did he do? Well, he was the mastermind behind one of the largest corporate frauds that the United States has witnessed. 

Ebbers was the CEO of WorldCom, a highly reputed telecommunication company. In 2002, WorldCom s financial statement highlighted a profit of 2,393,000 dollars, with a share price of 25$

To achieve these glittery figures, top management indulged in fraudulent reporting technique of classifying expenses as capital expenditure. The top management wanted to retain earnings to revenue ratio of 42%. Since they were a telecommunication company, they used pipes which when used at full capacity lowered the production cost per unit. But, in 2002, the economy was declining resulting in lower demand.  Consequently, the pipes were not used to the fullest. Ebbers convinced the auditors to reclassify the expense of pipe not used as a capitalized asset. His reasoning was that excess capacity of the pipe would enable the firm to enter the market quickly at some future time when demand grew stronger than the present levels. This reasoning was baseless, illogical and did not conform to GAAP or any other accounting framework. All in all, these tactics were used to overstate the income and achieve a favorable stock price as Ebbers wanted to protect his personal fortune, which consisted mostly of WorldCom stock. In addition, WorldCom had made loans of $400 million to Ebbers.

Arthur Anderson, their external auditors supported the top management in fraud as they were paid lucrative consultant fees. Even though their software classified WorldCom as a high-risk entity, they still continued audit procedures and didn't take the appropriate actions to stop fraud. 

WorldCom's numbers looked attractive when rest of the industry was declining, a surprised SEC asked for information. That is when the fraud came to light. The actual income figure was a negative (622) million dollars. After the discovery of fraud, the share prices plummeted to 2$ or lower.

Lack of cultural integrity, non- existent written ethical code, poor ethical values of top management fueled by conflicts of interests with third parties led to this massive fraud. Despite being a doctorate in law, Ebbers failed to practice what he had learned and was sentenced to 25 years in prison. The pressure to maintain a specific ER ratio, the greed of living an outrageous lifestyle and to have an opportunity to easily conduct fraud must have led Ebbers to take certain wrong choices but is it really worth it? Is it advisable to forgo ethics and look at numbers only? This case is a classic example of why Ethics is a fundamental topic in professional courses.

 

References:

https://www.youtube.com/watch?v=AWnWbX0jHhc

https://www.youtube.com/watch?v=7g_d-phoUrU

 


Parvathy liked
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shreu30
(@shreu30)
Active Member
Joined:11 months  ago
Posts: 4
02/03/2018 9:02 pm  

WorldCom: Largest Corporate Scandal

On 15th March 2005, Bernie Ebber's life turned upside down. The man who owned a private jet, yacht clubs, had an extravagant lifestyle now had to face the four walls of  prison. What did he do? Well, he was the mastermind behind one of the largest corporate frauds that the United States has witnessed. 

Ebbers was the CEO of WorldCom, a highly reputed telecommunication company. In 2002, WorldCom s financial statement highlighted a profit of 2,393,000 dollars, with a share price of 25$

To achieve these glittery figures, top management indulged in fraudulent reporting technique of classifying expenses as capital expenditure. The top management wanted to retain earnings to revenue ratio of 42%. Since they were a telecommunication company, they used pipes which when used at full capacity lowered the production cost per unit. But, in 2002, the economy was declining resulting in lower demand.  Consequently, the pipes were not used to the fullest. Ebbers convinced the auditors to reclassify the expense of pipe not used as a capitalized asset. His reasoning was that excess capacity of the pipe would enable the firm to enter the market quickly at some future time when demand grew stronger than the present levels. This reasoning was baseless, illogical and did not conform to GAAP or any other accounting framework. All in all, these tactics were used to overstate the income and achieve a favorable stock price as Ebbers wanted to protect his personal fortune, which consisted mostly of WorldCom stock. In addition, WorldCom had made loans of $400 million to Ebbers.

Arthur Anderson, their external auditors supported the top management in fraud as they were paid lucrative consultant fees. Even though their software classified WorldCom as a high-risk entity, they still continued audit procedures and didn't take the appropriate actions to stop fraud. 

WorldCom's numbers looked attractive when rest of the industry was declining, a surprised SEC asked for information. That is when the fraud came to light. The actual income figure was a negative (622) million dollars. After the discovery of fraud, the share prices plummeted to 2$ or lower.

Lack of cultural integrity, non- existent written ethical code, poor ethical values of top management fueled by conflicts of interests with third parties led to this massive fraud. Despite being a doctorate in law, Ebbers failed to practice what he had learned and was sentenced to 25 years in prison. The pressure to maintain a specific ER ratio, the greed of living an outrageous lifestyle and to have an opportunity to easily conduct fraud must have led Ebbers to take certain wrong choices but is it really worth it? Is it advisable to forgo ethics and look at numbers only? This case is a classic example of why Ethics is a fundamental topic in professional courses.

 

References:

https://www.youtube.com/watch?v=AWnWbX0jHhc

https://www.youtube.com/watch?v=7g_d-phoUrU

 


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