Joy Of Management Assignment

Presentation on: Why do Business Organizations exists?

Submitted to: Prof. Sunil

Sangra
 What is a Business organizations ?

Business organization, an entity formed for the

purpose of carrying on commercial enterprise.
Such an organization is predicated on systems of
law governing contract and exchange, property
rights, and incorporation.
Business enterprises customarily take one of
three forms:
 Individual proprietorships 
 Partnerships
 Limited-liability companies (or
corporations). 
“Never call an accountant a credit to his
profession ; a good accountant is a debit to
his profession.”
-Charles Lyell
 History of
WorldCom
 Founded initially as a small company named Long
Distance Discount Services in 1983.
 It merged with Advantage Companies Inc to
eventually become WorldCom Inc, naming its CEO
as Bernard Ebbers.
 Successful completion of 65 acquisitions spending
almost $60 billion between 1991 and 1997, whilst also
accumulating $41 billion in debt. 
 During the Internet boom WorldCom’s stock rose from
pennies per share to over $60 a share.
 The ‘second-largest long distance phone company in
the US’  mainly due to its aggressive acquisition
strategy.
 Acquired MCI Communications Inc in 1998,
becoming the largest merger in US history at that time. 
 About WorldCom
 WorldCom was acquired by Verizon Communications in January 2006. Known as MCI at the time of the
merger, WorldCom’s network assets are now part of Verizon Enterprise Solutions.
 WorldCom was originally founded in 1983 as Long Distance Discount Service, Inc. After growing to
become one of the largest long distance providers in the country.
 WorldCom was forced to file for Chapter 11 bankruptcy protection in 2002 in the wake of a well-
publicized accounting scandal.
 WorldCom would emerge from bankruptcy in 2004, rebranding itself as MCI, before being bought by
Verizon.
 Verizon Business was created to serve medium and large businesses and government customers.
 Verizon Business became Verizon Enterprise Solutions in 2012.
What they did ?

To hide the losses company was facing due to the

end of the DOTCOM BUBBLE & to inflate
earnings in order to maintain WorldCom's stock
price what they did was
 Reduce the amount of money held in reserve
by $3.8 billion and moved this money into the
revenue line of it’s financial statements.
 In 2000, classified operating expenses as long
term capital investments ($3.85 billion).
 These changes turned WorldCom’s losses into
profits. It also made WorldCom’s assets
appear more valuable.
 Persons Involved

Bernard Ebbers, CEO Scott Sullivan, CFO

David Myers, VP Buford Yates Troy Normand Betty Vinson

Why It Happened?
By 2001 the telecommunications market was softening;
meaning prices were falling due to an excess of supply and a
decrease in demand.
‘The fraudster greatest liability is the certainty that the fraud is too
clever to be detected.’
-Louis J. Freeh
 How they did?
 Key persons involved did so by manipulating its financial
data, which affected its 
 Income statement, 
 Balance sheet, 
 Form 10-K filing, and 
 Annual report

 The fraudulent accounting method that they used were

majorly two in number:
 ‘The reduction of reported line costs’ and the
‘exaggeration of reported revenue’ .

 These methods were used to ignore the Generally

Accepted Accounting Principles (GAAP) along with not
informing the users of the financial statements of the
changes and alterations made to the previously used
accounting practices.

 This was done to reduce their E/R ratio, which was used
as the performance indicator of telecommunications
companies[
 Discovery of the fraud

 After reading in  Fort Worth Weekly internal audit manager GLYNN SMITH posted at worldcom hq suggested her
boss Cooper, that she should start that year's scheduled capital expenditure audit a few months early. Cooper
agreed, and the audit began in late May.
 Soon afterward, chief financial officer Scott Sullivan, Cooper's immediate supervisor, called Cooper in for a
meeting about audit projects, and asked the internal audit team to walk him through recently completed audits.
When Smith's turn came, Cooper asked about the prepaid capacity entries. Sullivan claimed that it referred to
costs related to SONET rings and lines that were either not being used at all or were seeing low usage. He
claimed those costs were being capitalized because the costs associated with line leases were fixed even as
revenue dropped. He planned to take a restructuring charge in the second quarter of 2002, after which
WorldCom would allocate these costs between restructuring charges and expenses. He asked Cooper to
postpone the capital-expenditure audit until the third quarter, heightening Cooper's suspicions. [3]:233–237
 That night, Cooper and Smith called Max Bobbitt, a WorldCom board member and the chairman of the Audit
Committee, to discuss their concerns. Bobbitt was concerned enough to tell Cooper to discuss the matter with
Farrell Malone of KPMG, WorldCom's external auditor.[3]:237–238 KPMG had inherited the WorldCom account when
it bought Arthur Andersen's Jackson practice in the wake of Andersen's indictment for its role in the 
accounting scandal at Enron.[3]:229 By this time, the internal audit team had found 28 prepaid capacity entries
dating back to the second quarter of 2001. By their calculations, if not for those entries, WorldCom's $130 million
profit in the first quarter of 2002 would have become a $395 million loss. Despite this, Bobbitt thought it was
premature to discuss the matter with the Audit Committee at that point. He did, however, discuss the matter with
Sullivan, and assured Cooper that he would have support for those entries by the following Monday. [3]:240–241
 Fraud revealed[edit]
 Cooper decided not to wait to discuss the matter with Sullivan. She decided to ask the accountants who made
those entries to provide support for them herself. Beforehand, she asked Kenny Avery, who had been
Andersen's lead partner on the WorldCom account before KPMG took over, if he knew about prepaid capacity.
Avery had never heard of the term, and knew of nothing in Generally Accepted Accounting Principles that
allowed for capitalizing line costs. Andersen, it turned out, had never tested WorldCom's capital expenditures for
it
After Effects
 Congress enacted the Sarbanes-Oxley Act
(SOX). This law was designed to increase
confidence in stock markets and public
companies so people would feel confident
enough to invest.
 More audit committees.
 Internal controls for public companies.
 No more than two board members can be
certified public accountants.
 Bigger criminal penalties for securities fraud.
 Companies must change audit partners every
five years.
 Conclusion
 A good way to avoid management oversights is to subject the
control mechanisms themselves to periodic surprise audits…
 The point is to make sure that internal audits and controls are
functioning as planned.
 It is a case of inspecting the inspectors and taking the
necessary steps to keep the controls working efficiently.
 It is up to Top Management to send a clear and pragmatic
message to all employees that good ethics is still the
foundation of good business.
 First and foremost need a proper ‘Tone from the Top’-
without it no system of controls will be effective.
 Need an environment where controls matter and doing
business in accordance with the law and ethically is said and
practiced.
Bibliography

 https
://www.mbaknol.com/business-ethics/case-study-world
com-accounting-scandal
/
 https://
www.theguardian.com/business/2002/aug/09/corporatef
raud.worldcom2

 https://
www.thebalance.com/worldcom-s-magic-trick-356121
 https://knowledge.wharton.upenn.edu/article/what-went
-wrong-at-worldcom
/
 Thank you..

Presented by: Team 6

Deepak Yadav
Garima Arora
Harshit Kanchan
Namrata Borayara
Riya Jindal
Vidhi Agarwal