Worldcom Filed for Bankruptcy

¶ … Shift to Activity-Based Accounting

Discuss the Information Systems implications of this case. How do the business processes and the Information Systems relate to solve the problems encountered?

The devolution and dissolution of the corporation known as WorldCom, due to accounting fraud rocked the business world. However, there is at least one potential solution for what is left of the company. The company has shifted from spreadsheet accounting to using activity-based software that measures corporate productivity according to business units in a more accountable fashion.

Partly to prevent future accounting abuses and partly as damage control, the former company known as WorldCom, now re-christened with its old name MCI, has adopted this new cost-analysis software. MCI is attempting to use information systems innovation, combined with more conscientious managers, to correct its old problems of insufficient accountability of the financial staff. Tom Spengler, author of the article "Back in Control," notes that, lost amidst the hype, one of the most extraordinary features about the WorldCom scandal is that the executives at the company "didn't really know" what the company's costs were for each line of business when it filed for bankruptcy in July 2002. The accountants had essentially kept the other departments of the company in the dark.

The new software that is being implemented by the company is only part of its recovery from massive accounting fraud and the biggest bankruptcy in U.S. history. It has also attempted to clean house in terms of its administration, hoping that new personnel and new informational systems combined will enable the company to comply with tougher federal accounting rules.

Now public companies must disclose financial reports by company segment. MCI plans to begin reporting profit-and-loss figures starting with the second quarter of 2004 for its three newly reorganized business units, including "Enterprise Markets, U.S. Sales and Service, and International and Wholesale Markets."(Spengler, 2004) The company has established internal processes for determining profit and loss by these business units, using activity-based software that charts costs according to these separate units.

Still, new software is not enough. Even the best financial information systems can not flag questionable accounting activities unless the informational technology is analyzed correctly by all members of the company -- information systems are only as good as the information managers who run them. "It's not like they had outdated systems," before the scandal broke, noted one observer quoted by Spengler. Internal standard operating procedures amongst human staff that hold accountants accountable must supplement the correct use of the newly adopted and more modern informational systems at WorldCom.

For instance, after an internal audit found the company had inappropriately transferred more than $9 billion of access-cost expenses to capital accounts between 1999 and 2002," no red flags were raised, It's also "the people you have and the structure for reporting," as well as the viability of the informational systems that are used.

After the scandal, in 2002, the accountants currently used by the company e-mailed spreadsheets to 200 business managers, asking them to assign costs to activities in their units, in contrast to past practices where the accountants would simply operate in their own sphere.

Even before the full implementation of the software, this e-mailing was an important first step in creating standard operating procedures of accountability. "That way, it's not just the finance department making up the numbers." Still, despite the greater accountability, "much of the data was either inaccurate or incomplete." The fact that the data was stored on spreadsheets only highlighted that this was not a viable method of gathering information every quarter for consolidated financial reporting.