Management

Circumstances leading to the manipulation of financial statements. Was it necessary.

Introduction:

WorldCom was a fast expanding company in the decade of 1990. It was led by CEO, Bernard Ebbers, and CFO, Scott Sullivan. In the late 90s, the company was unable to cope up with the expectations of the Wall Street in terms of revenue and earnings. The CEO still insisted that the company needed double digit growth, and pushed for aggressive targets. These were not supported by historical data or strategic assessments. In order to meet these targets, WorldCom began boosting its revenue through a wide range mask of accounting manipulations that included drawing down on reserves set aside for expenses. There were no checks and balances in WorldCom and the people taking the accounting decisions, were the ones posting the entries in the journals and general ledger. They were also reviewing and approving the reporting.

In 2000, the telecommunications industry entered a downturn and WorldCom‟s aggressive growth strategy suffered a serious setback. As the company’s s revenues kept on declining it became more and more difficult to mask the true numbers. The internal auditors of MCI caught the manipulations and reported to SEC and an investigation was launched against WorldCom. The investigation revealed the biggest financial scams in the US history till then. Many of the members of top management were sentenced to jail. Insurers and Banks lost their money. However, as the WorldCom’s shares became a penny stock, the investors were the most affected party because of this scam.

In this reply, I have tried to analyze the factors that led the company to manipulate its financial statements.

Factors that resulted in manipulation of financial statements

The factors that forced the management to manipulate the financial statements can be categorized under 3 heads:

* Incoherent Business Strategy

* Internal Performance Goals

* External Expectations

WorldCom’s fraud was...