Worldcom Accounting Fraud-世通財務(wù)造假案例分析

1、WorldCom OverviewNature of Accounting FraudProblems (Internal and External)Fall of WorldCom and lessons from itEthical choicesStarted in Started in 1983 as 1983 as LDDSLDDSBernie Bernie EbbersEbbers Joined in Joined in 1985 1985 Acquisition Acquisition of MFS of of MFS of 1996 1996 Acquisition Acqui

2、sition of MCI in of MCI in 1997($42 1997($42 billion , the billion , the largest largest takeover in takeover in US)US)Fail in Fail in acquisition acquisition of Sprint in of Sprint in 20002000Dotcom bubble Dotcom bubble burst in 2000burst in 2000WorldCom WorldCom Loans Loans EbbersEbbers $400M (200

3、0-$400M (2000-2002)2002)Accounting Accounting fraud fraud uncovered in uncovered in 20022002Emerged as Emerged as MCI from MCI from bankruptcy in bankruptcy in 20042004Financial HighlightsFinancial Highlights19951995199919992001200120042004Revenues ($ billion )$2.2$37.1$35.2$20.7Total assets ($ bill

4、ion )$3.4$91.1$103.9$17.1Employees (in 000)7.597.687.840.4Market capital($ billion )$3.3$150.5$42.8$6.4Debt ($ billion )$0.8$13.1$30.0$5.9Total capitalization ($ billion )$4.1$163.6$72.8$12.3Financial statements WorldCom OverviewNature of Accounting FraudProblems (Internal and External)Fall of World

5、Com and lessons from itEthical choicesDefinition :Definition :Accounting fraud is the intentional misrepresentation of financial statements in order to obtain wrongfully an advantage, retain a benefit, or avoid a detrimentPressure to “cook the book”a) The growing pace of income is generally slowing

6、downb) Driven by interests (political interest like personal fame and image in the public, economical interest )Typical methods to “cook the book”a)Cost of assets Inventory is not real Fixed asset is fake a)Unreal liabilities Accounts payables is overvalued Accrued expenses are not reala)Inflated in

7、comeDifference between earning smoothing and accounting fraud Consistency Matching Conservatism choosing of accounting item What did WorldCom do :a)Accounting fraud in two method: improper release of accruals improper capitalization of operating expenseWorldCom OverviewNature of Accounting FraudProb

8、lems (Internal and External)Fall of WorldCom and lessons from itEthical choicesLoss of strategic direction Corporate cultureOrganizational structure Board of directors Failure to acquire SprintThe poor performanceemployees should not question their superiors there is no written policies. Each depart

9、ment had its own ruleslegal function was less influential and less welcome than in a healthy corporate environment The corporate governance structure is so complicated Information is not consolidated 50% of nonexecutive members No regular communication Decisions not based on the interest of sharehol

10、ders, but personal interests. External Auditor Economical downturnWeak government regulation Formerly big five Fast growing sales revenueTesting information accuracy rather than comparable testsChanged the rating from high risk according to software to moderate riskNASDAQ stock price from 1994 to 20

11、08 WorldCom OverviewNature of Accounting FraudProblems (Internal and External)Fall of WorldCom and lessons from itEthical choicesImpact of the accounting fraud For Shareholders$180 billion dollar loss of share stock valuePreferred Stock Owner $37.8 billion of debt and proffered stock holder lossComp

12、any and employees $750 million punish from SEC57000 employees lost jobs All current and former employees lost retirement savings (in WorldCom Stock)What happened on senior management Ebbers-CEO 25 years in prison Sullivan-CFO 5 years in prison Myers-controller 1 year in prison Yates-Dir of Acctg 1 y

13、ear in prison Vinson-Acctg Dept 5 months in prison Manager 5 months house arrest Normand-Acctg Dept 3 probation Manager Board of director Board of director 12 director agreed to pay a total of $25m to settle securities class action caseInvestment Bankers :settlement of security class action Investme

14、nt Bankers :settlement of security class action Citi Group $2.6 billion JP Morgan $ 2.0 B Other $ 1.4BGrubman and Soloman Brother Securities Analyst fined $15M and banned for life from practice. Accounting SystemProblem: Each department had its own rules and management style. Nobody was on the same

15、page. Solution: Build fair, clear and integrated accounting system. Ensure accurate, reliable accounting records. Accounting SystemProblem: employees should not question their supervisorSolution: Reduce managements intervene to the normal daily recording. Auditing SystemProblem: Betty Vinson, Senior

16、 manager of General Accounting, followed supervisors illegal instruction of record entry although her professional judgment tell her that is wrong. Solution: Build up the proper auditing system that allows whistle blowing internally.Auditing SystemProblem: Internal Cynthia Cooper, Head of Internal A

17、udit department. Found the accounting issues but wasnt allowed to check in depth. Solution: Enforce the power of internal auditing department. Auditing SystemProblem: ExternalConflict of “satisfying” customers and auditing ethics Solution: SEC regulation on external auditing firms and industry self

18、regulation rules. WorldCom OverviewNature of Accounting FraudProblems (Internal and External)Fall of WorldCom and lessons from itEthical choicesSuppose you were :A mother for two kidsIn mid 40 Pursuing promotionWhat you would do if you were Betty Vinson? As Betty Vinson, you could have: Talk to internal auditing department and provide the information But before you