Accounting Fraud at Worldcom Assignment

Prepared for,

Prof. Khalid Hegazy

Prepared by,

Wael Abdelhalim

ID: 101020

Prepared for,

Prof. Khalid Hegazy

Prepared by,

Wael Abdelhalim

ID: 101020

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What are the pressures that led executives and managers to "cook the books"?

* During 1990s, CEO Ebbers goal was to make Worldcom number 1 on Wall Street Stock market and increase the market value through revenue growth.

* The company’s strategy was to expand through mergers and acquisitions.

* The company’s focus was building revenues and acquiring capacity to cater for expected growth. Everyone in the company was securing short term revenue and accumulating long term costs (line costs). They wanted to do whatever it takes to grow the revenue.

* In 1999, Worldcom and Sprint was discussing a merger which was refused by the U.S. Justice Department in 2000.

* In 2000, telecommunications industry started declining due to the following:

* Strong Competition which led prices down

* Overcapacity due to aggressive forecasts

* Recession due to dot.com bubble collapse led to reduced demand on the telecommunication services.

* Worldcom had to match competition and lower down the prices which impacted revenue while having high expenses. This put pressure on the E/R ratio. For first quarter of 2000 the E/R ratio was 42%. They tried to maintain it by all means.

* The E/R ratio was closely monitored by analysts and observer, which could impact their stock price and market value.

* Also Ebbers wanted to protect his personal financial condition. For this reason, he had to show continually growing net worth in order to avoid margin calls on his own WorldCom stock that he had pledged to secure loans to finance his own business.

What is the boundary between earnings smoothing or earning management and fraudulent reporting?

Earning Management:

Earnings management is the process of taking deliberate actions within the constraints of GAAP so as to achieve a desired...