week 2

WorldCom

The WorldCom accounting scandal, which was uncovered during 2002, is generally thought of as one of the ten worst corporate accounting scandals perpetrated of all time in the United States.

In summary, WorldCom filed fraudulent financial statements with the Securities and Exchange Commission (SEC) that overstated total assets by up to $11 billion between roughly 1999 and 2002. During this same time, WorldCom went on an acquisition spree by purchasing some of its competitors. These acquisitions increased the size of the company and its total stock market capitalization.

Once the financial statement fraud was discovered, 30,000 WorldCom employees lost their jobs and investors suffered huge financial losses as the value of WorldCom stock dropped approximately $180 billion.

The main player at WorldCom was CEO, Bernie Ebbers. A key element of Ebbers’ fraud consisted of two parts:

1) capitalizing rather than expensing certain expenses, and

2) simultaneously inflating revenues by journalizing fictitious transactions.

WorldCom’s internal auditing department discovered the fraud related to the improper capitalization of expenses, which overstated earnings approximately $3.8 billion.

Bernie Ebbers, CEO was fired when the financial statement fraud was discovered. Further, he was sentenced to 20 years in prison for fraud, conspiracy to commit fraud, and filing false financial statements with the SEC.

The WorldCom fraud was discovered just one year after the Enron accounting scandal. Thus, Congress had already been preparing new legislation and passed the Sarbanes-Oxley Act (SOX) in 2002. SOX is the most sweeping set of new business regulations since the 1930s, when the Securities and Exchange Acts of 1933 and 1934 were passed.

Bernie Ebbers served 13 of his 25-year sentence before passing away in February 2020 at the age of 78. District Court Judge Valerie Caproni released Ebbers from prison for medical reasons less than two months before his death. She wrote “Ebbers has essentially served the life sentence that the sentencing court predicted it had imposed” (Stempel, J. (2020, February 3).

Search the Internet and to find a plethora of information on the following:

WorldCom fraud

Background of the CEO, Bernie Ebbers

How WorldCom’s market capitalization grew to one of the largest firms in the US

Information on the trial and related court testimony that convicted Bernie Ebbers

The internal audit team’s role in discovering and reporting the fraud to the Board of Directors, and

The role WorldCom's Controller played in the fraud.

In responding to the questions related to this case, be sure to provide citations and a Reference list of all sources you researched and included in your paper. Your answers to this case study should be 5 pages in total, including cover and reference pages. The body of the paper, which must be at least 3 pages in length, should be double-spaced. Make a copy of each question below and place the questions into the body of your paper in bold-type to ensure you have addressed each of the questions in your submission.

Questions (Requirements)

1. To what extent do you agree with Judge Caproni’s statement that Ebbers essentially served a life sentence?

2. Compare the lack of asset forfeiture between Bernard Ebbers and Bernard Madoff.

3. Fraud Triangle: you have learned that the Fraud Triangle consists of perceived pressure, perceived opportunity, and rationalization. Based upon the research you performed, explain how the fraud triangle applies to the following players in this fraud:

- Bernie Ebbers, the CEO

- WorldCom's Controller

4. During court testimony, in what ways did Bernie Ebbers try to rationalize his behavior as CEO of WorldCom while this fraud was being perpetrated? Describe how Ebbers attempted to rationalize his behavior and your reaction to his rationalization testimony. Be specific.

5. How would owning and operating a small family business, like WorldCom at a time in history with rapid development and growth, create potential temptations and opportunities to commit fraud? Be specific.

6. Assume you were asked to be an expert witness in this class. Assume you were asked to testify whether the journal entries recording fictitious revenues were fraudulent, whether the journal entries that improperly capitalized operating expenses as assets on the balance sheet were fraudulent. What facts would you highlight and include in evidence to support your testimony as an expert witness?

Reference:

Stempel, J. (2020, February 3). Obituary: Bernard Ebbers, convicted of orchestrating WorldCom fraud; dead at 78. Retrieve March 21, 2020, from https://www.reuters.com/article/us-people-ebbers-obituary/obituary-bernard-ebbers-convicted-of-orchestrating-worldcom-fraud-dead-at-78-idUSKBN1ZX0NB