WorldCom fraud and corporate accounting scandal

Worldcom financial disaster provided many substantial learning points while helping expose the importance of accuracy and integrity in accounting procedures and standards. Eight years ago, when the true nature of the rise and fall of this telecommunications giant became public, many in the financial sectors of the world demonstrated shock and disbelief at the remarkable scope of corruption seemingly stemming from this agency. The purpose of this essay is to highlight worthwhile lessons of the Worldcom accounting scandal occurring at the early part of this century in an attempt to gain understanding of the temptations, consequences and regulations of the ever changing world of finance and its accounting procedures.

Understanding and defining fraud is helpful in understanding the events of the Worldcom situation. My personal definition of fraud states that fraud is an intentional act to deceive another in order to gain a competitive advantage over that targeted person or group of people. A very competitive, large scale market, such as the telecommunications example in the late 90's, coupled with new technological advances, seemed to combine to allow fraudulent abuses and facilitate those in power to take advantage of the reputation and willingness of the business world. The high paced world of finance and big business creates a situation where ethics and wise judgment is often overlooked. This environment appeared to set the conditions for this problem.

It is impossible to pinpoint all the deception and fraud that likely occurred during Bernard Ebbers' time as CEO of Worldcom, but many attribute the false profit projections issued by the company to intimidate the market as the root cause. Using deceptive techniques requiring intimidation and coercion, the leadership team and its hired accounting firm of Arthur Anderson successfully promoted the company's worth beyond reality. Projecting an image of strength is often a wise tactic however, taken to the extreme, deceit and fraud seem to arise. This lie, which may have started as a slight exaggeration, eventually led to the exposure of the false documentation and forthcoming investigation of the company that would soon prove fraudulent actions by the accounting and leadership departments.

This fraud effected the different parties involved in different ways. The company employees, of not only Worldcom, but of competing companies as well, lost their jobs as labor costs were trimmed to stay competitive as disruptions in the labor forces hold their own powerful effects. Many took the financial statements as the honest truth, and good business decisions based on fraudulent information turned disastrous, causing chaos, doubt and suspicion within the telecommunications world. Creditors were often left in the cold as imaginary money cannot be paid back and it was not. Wall Street eventually recovered, only to see regulatory efforts take more hits to its reputation on its ability to function in later scandals of 2008. Mr. Ebbers and his crew of financiers eventually were punished and put in federal prison for their mistakes.

The internal auditors for Worldcom actually exposed the wrongdoing of the leadership of this company. The external accounting firm Arthur Anderson LLP was eventually found liable for its role within the scandal and ordered to pay $65 million to the stockholders who lost money from their investments with Worldcom. Arthur Anderson and his firm were also responsible for the Enron accounting scandal as well and has had his conviction for his crimes overturned by the Supreme Court in recent years.

Looking back, it seems that nothing would have prevented such a disaster. Efficient accounting procedures and regulations were there to be followed but were not. The problem seemed to rest more within the moral character of the leadership and not necessarily the system. Awareness about this subject may provide the key to preventing future scandals. Honest people bringing to light the crimes is what brought justice to this case and in this individual character lies the hope and honesty that can identify and redirect these ideas into a more productive and creative field.

It is remarkable that Worldcom's disaster now ranks third in largest financial disasters in modern business. The lessons that should have been remembered were obviously forgotten demonstrated by the failures and bailouts to Wall Street firms associated with the mortgage securities frauds just three short years ago. In the Worldcom example, most of the blame rests upon Mr. Edders's shoulders and I agree with this accusation, however in the more recent cases of fraud a larger group of agencies spanning the entire world, effecting almost all major markets seem to dwarf the Worldcom situation. It is unfortunate to notice this trend of scandal of fraud growing instead of dying.