analysis of worldcom scandal
TRANSCRIPT
Analysis of WoldCom Scandal
Aslan GürdalHüseyin GültekinKamuran Koçak
Corporate Governance – Case Assignment
Agenda
WorldCom
Structure
Analysis
StakeholdersScandals & Problems
Facts
Organizational StructureBoard Structure
Owner Structure
Environment & MarketSWOT AnalysisStrategy
Agenda
Reasons for the problemsWhat do we recommend?Questions
WorldComCompany Information & Facts
Founded in 1983 in Hattiesburg , MississippiIt was the second-largest long-distance discount services in the U.S.Started as providing voice telephony serviceEntered to other markets through acquisitions
Data and satallite communicationsInternet ServicesWeb Hosting
WorldComCompany Information & Facts
Acquired over 60 companies in telecommunication industryChanged its name to MCI – Former merger company after filling for bankcrupcy protectionWrote-off 79.9B, the biggest one time write-off any US company has ever taken
WorldCom Company Information & Facts
Variety of people from many acquired companiesDepartmans are distantNot enough management control for distant parts
WorldComScandals / Problems
The biggest business scandal in U.S. HistoryBoard members were also Stakeholders/ShareholdersGrubman, an analyst from SSB, also attended board meetings as financial advisorAgency problem – Using company jets etc.When company gets bigger, risks were not seenInternal auditors did not probe the risksDirectors were «rubber stamp»ing the decisions of CEO
WorldComScandals / Problems
What Happened?
$11B inflated
30.000 lost jobs
$180B Losses For Investors
WorldCom Scandal2002
WorldComScandals / Problems
Main Player
• CEO: Bernie Ebbers
HOW HE DID?
• Under reported the costs by capitalizing rather than expensing
• inflated revenues with fake accounting entries
HOW HE CAUGHT?
• Internal auiditing departmen discovered $3.8 billion fraud
WorldComScandals / Problems
Legistlation
• CEO sentenceded 25 Years• CFO Fired• Controller Resigned• Company filled bunkcrupcy
25 Years
Congres passed the Sarbanes-Oxley Act., introducing the
most sweeping set of business regulations since 1930s
WorldComStakeholders
CEO was the biggest stakeholderMost of the directorsFinancial analysistInvestment banksOutside auditorsCustomers
StructureOwner/Shareholder Structure
Shar
ehol
ders
CEO – Bernie Ebbers
CFO – Scott Sullivan
Some board members
SSB
Public Investors
StructureBoard Structure
CEO Ebbers dominated the decisionsMost of directors were also shareholders Board of directors did not protect shareholders interest (Rubber stamp management decisions)Management steer internal auditors out of sensitive areasExtreme bonuses for top management
StructureOrganizational Structure
Variety of people from many acquired companiesAcqusion of over 60 companiesDepartmans are distantNot enough management control for distant parts
AnalysisStrategies
Rapid growth through acqusitionsFinances by loansEnters new businesses by using acquired companiesInorganic growthNominates directors to keep in the company
AnalysisSWOT Analysis
S OW TStrengths
-Second largest telecommunication company in the US--Acquisitions enables to enter new telecom markets
Opportunities
-Easy to take loans from investor and finance companies-- Hard to compare balances due to constant stream of acquisitions
Weaknesses
-Understaffed auditing department- Shareholders are also boardmembersDirectors only rubber stamp CEO decision-Agency Problem
Threats
-Increasing competition and new technology.-Rapid and inorganic growth-The risks were not considered seriously.
Industry and Environment Market and environment analysis
Recession of economyLack of government control over companiesIncreasing competition and new technology reduced revenue and profits Telecommunication industry experienced slowdowns
Reasons For The Problems
Organizational structureCEO was the biggest stakeholderUnreasonable loans to CEOFailing leadershipAgency problemNo backup plans
Reasons For The Problems
Reasons For The ProblemsFraud Triangle
Romney & Steinbart (2008),
What Do We Recommend?Ensuring the auditing is done independently.There should be non executive board members for controllingEnsuring internal audits and controls are functioning as plannedTaking the necessary steps to keep the controls working efficientlyCreating ethical policy throughout the companySellling some of non-core businesses such as wireless.Going on discussions with bank lendersCreating a new position of chief service and quality officerGetting rid of Groupthink habit.
What Do We Recommend?Internal Control Structure
Thank you for listening
Questions?