WorldCom Scandal: A Detailed Case Study on Corporate Crime Issues

This case study provides an in-depth analysis of the WorldCom scandal, a significant corporate crime involving accounting fraud and misrepresentation of financial statements. The report details the fraudulent activities, including the exaggeration of reported earnings and reduction of line costs, and examines how these practices were facilitated by a weak corporate culture and inadequate internal controls. It also discusses the impact of the scandal on corporate governance, leading to the enactment of the Sarbanes-Oxley Act. The study proposes solutions such as stricter auditing practices, establishing a culture of legal compliance, and implementing whistle-blowing mechanisms. The case underscores the importance of ethical leadership and robust oversight in preventing corporate fraud. Desklib provides a platform for students to access similar solved assignments and study resources.

Case analysis on a corporate
crime issue

Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
JUSTIFICATION........................................................................................................................5
Effects of case on corporate governance structure:.....................................................................7
Legislative Consequences............................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
In the United Kingdom in order to prosecute any organization for the charges of corporate crimes
or the criminal offenses it is required that the actus reus as well as the mens rea must be
established beyond the reasonable doubt. Actus rea indicates that there has been committed an
act on the part of the company whereas men specifies that there lies the culpable mind, which
refers that the organization had the required intent while executing the said acts. The major
change was brought in 2014 in the country with respect to the corporate crimes with the
introduction of the DPAs which is the deferred prosecution agreements, which specifies the
changes bases on which the companies can now be made convicted (Ganschow, and et.al., 2020).
The said report is going to present a case analysis on the corporate crime issues of the country.
The corporate crimes which has been chosen for this report is of the worldcom scandal which
took place in the year of early 2000s. It also makes an attempt to analyse the possible impacts of
the crime on the society. Moreover, it also specifies the certain proposals with respect to the
corporate crimes.
TASK
The scandal of worldcom is considered as one of the biggest scam which took place in
the history of the country. It is said to be the most widespread and shocking corporate frauds
which opened the eyes of the legislators that there lies the need of some specified regulation in
order to regulate the conduct of the corporations. Moreover, the scam of worldcom is not only
considered as one of the biggest ever accounting fraud but also tells the story of the one major
bankruptcy story. The company worldcom was said to be one of the biggest enterprise with
respect to the sector of telecommunication which aimed at providing the services of long
distance phones. The company initially begun as a small venture named LDDS which later
expanded its branches in the 65 states having number of employees nearly 85,000. The CEO of
the company was the Bernie Ebbers who at first was appointed as the mere investor. The
organization started its business from the earnings of $30 billion profits as a result of which it
established six more companies of the telecommunication (Gottschalk, 2018)
(Gottschalk, 2020). The very first information with respect to the fraudulent activities on the part
of the company was revealed on dated 25th june in year 2002. Where as a result of which in
investigations it was discovered that in total there lies the misstatements of $11 billion. FACTS -

The company started its operations in the year of 1983 being named as Long distance discount
services, later which acquired the name of worldcom Inc by being erging with the other company
named Advantage Companies Inc. The company majorly became famous in the sector of
telecommunication between the year of 1991 to 1997, by the way of acquisition of the other
companies as well. By this year the company while also spending the amount of $60 billion on
the mergers also accumulated the debt of $41 billion. Moreover, the overall stocks of the
company made a sudden rise to $60 billion, during the period of internet as a result of which the
value of the company was greatly marked as well as recommended for the purpose of investment
by the analysts and brokers (Gottschalk, 2021). Further, in the early 90s the company, mainly
because of its successful acquisition strategy it took the position of second place of being the
largest long distance phone company of the state.
Later in the year 1998 the company announced the news of its merger with that of the MCI,
because of which there resulted in the continuous rise in the share prices of the worldcom.
Moreover, mainly from the year of 1999 to 2002 the company used the illegal as well as
fraudulent methods of accounting in order to mislead and defraud the investors of the company.
The two major methods of fraudulent accounting which the enterprise used were the
exaggeration of the reported earnings and the reduction of the reported line costs. Both the said
measures which are utilized to snub the rules of GAAP on with the facts that making unaware
the customers of their financial statements as well as the alliteration which were made to the
already existed practices of the accounting. Overall the gradual failure of the company was
initiated as a result of disturbance of the acquisition cycle, when the actual designed acquiring
did not worked out as a result of forces by the US Department of Justice and the EU over the
issues of it creating a dominance in the market. As a result of this the major impact was made on
the growth strategy of the company which was lost and there left no chances for some other
growth strategy. The said scenario marked the overall downfall of the company. Later in year
2002 the CEO of the worldcom while disclosing of the illegal methods of the accounting as well
as the made frauds filed for chapter 11 of bankruptcy (Gupta, and Kumar, 2020). By the last of
2003, it was computed subsequently from the inquiry that the institution overall possessions had
been inflated by around $11 billion.

ANALYSIS OF THE CASE - The senior management of company meddled with the books of
accounts so that they could portray the company’s financial growth as healthy and Up to market
expectations. The management changed the monetary figures, acknowledgement of profits,
modifications of the overall receivables, etc. other than this the organisation accounting
department, also reported the less amount of line costs than that of the actual one and showed th
exaggerated revenues in total of $1 billion In simple words, the organization did the following: Falsely Inflating Revenue – In order to falsely inflate the revenue they used their
cash/deposits reserves of $2.8 billion to show the same as revenue in the institution fiscal
regimes. Further, in the year 2000 they displayed the operational costs as long-term
investments. As a result of which the fiscal statements for the year 2001 showed a net
income of $1.38 billion. Reduction of Line Costs – Line costs could be understood as basically a operation cost
for the company (O'Shea, 2019). They portrayed a reduced the line costs in the books in
order to increase the institution total profit margins, depicting a advanced development
pace, as anticipated by marketplace. WorldCom finance chief, Sullivan later accepted in
the royal court that he manipulate and distorted the fiscal statements of the organization
and particularly accepted to ordering the unit of auditing to cut down the charges of
wireless unit US$150 million.
 MCI Acquisition – After the getting of MCI, the “illegal reduction game” of Worldcom’s
senior management continued as they kept on minimising the overall worth of some MCI
possessions and at the similar time increased the measure of goodwill by the identical
sum. The expense incurred in a year was spread over a period of time (eg 10 years) so
that smaller amounts of expenses could be shown against revenue. As a result a falsified
profit numbers was put forward in the market creating a false image of the company..
JUSTIFICATION

All these practices which are illegal were actually possible due to the firm had the atmosphere in
which fraud practices were conveniently attained as well as targets that are illegal were
accomplished. For this aim, the audit function of the internet that was formed to monitor and
keep workers more responsible for their practices was burked and observed by the some of the
people of the firm in a try to restrict their growth to the sensitive data. (Petra, and Spieler, 2020).
It was majorly conducted by the senior level management in order to keep the internal audit
division inadequate, commonly under qualified and they also keep them more stuck with several
different task and they can engage more data from them. Worldcom's culture was different issue
was with the largest issues of its non success, being more evident in every feature but majorly
passed decline the rank from the higher level management which starts with Ebbers. Breakdown
of the company due to the non presence of the responsibilities from few of the higher level
management. Additionally, attempted to debate in his protection which he was not there in the
brief features of the company and therefore, he was not aware of it as well as he was not
involved in the scam. However, he had the whole authority as well as pushed other people to
follow. These were few of the major reason behind the scam. As the atmosphere of the firm was
such at the higher level management which can convenient do practices which are illegal the
firm by influencing and modifying the fiscal statements and accounts by authorities the sales and
by changing the cost line which is managed to represent their profits instead of losses and after
the appropriate acquisition of the MCI this has been more convenient. (Pusch, and Holtfreter,
2021). Some of the major causes which resulted in the downfall of the worldcom are mentioned
as below –
 The company was following the extreme autocratic style of management as its corporate
culture.
 The final audits which were conducted by the independent auditors of the worldcom were
not up to the mark and was of inadequate nature.
 The overall controls of the financial system of the company was deficient in nature.
 There lied the lack of seemly apprehension of the institution and its operation on the part
of its directors and the members of audit committee.
 The workers of the worldcom lacked the spirit to communicate of the deceitful actions
which were being carried out in the name of the company.

SOLUTIONS:
 The company paid the costs of line, with respect to the use of other company’s networks
for their respective customers. The cost also comprises of the transport fees as well as the
access charges. The said costs, in actual sense are the expenses on the part of the
company, but instead it showed them as the earnings. Thus the very first solution mainly
with respect to this can be that the concerned auditors of the company must have
relooked the fiscal regime of the institution instead of voluntary ignoring the expenses.
 It is also required on the part of companies to establish the culture of legal compliance in
order to avoid such big corporate scandals (Rustiarini, and et.al., 2019).
 The employees must also take initiatives in order to highlight the concerns of team of
internal audit.
 There must lie the measure of whistle blowing also with third party audits.
 Moreover, instead of the only formal auditing there must also lie the concept of cross
internal audit within the company.
Effects of case on corporate governance structure:
There is a wide consensus that the world com fraud was the outcome of a a
disappointment of corporate governance. Subsequently the failure of Enron, the security is an
exchange commission had not yet deal with any new rules. After the senior administration of
word com was changed due to fraud, the Congress felt the requirement to deal with some new
legislative activities (Abdullah, and Said, 2018), the new US federal rule, the Sarbanes - Oxley
Act came into force in the year of 2002. It is now valid with the SEC need generally specified
their rules by managing the problems of corporate governance legal abidance and revelation of
the data.
The most significant provision of the Sarbanes - Oxley Act is section 404 that need the execution
and cyclic valuation of an inner scrutiny scheme of the management and it has become the
fundamental cause after the maximization of conformation value. Later on the scandal of the
pursuing corporate governance principle was plant that are as follows –
 Creating a civilization of Legitimate abidance unity in the management.
 Growth of the business plan of action and there must also be assessment of the danger
integral in those strategies.

 The scrutiny committee and the board should create fiscal dealing that demonstrate the
existent transactions situation as a business.
 The management also involve and autonomous auditing management for auditing the
financial dealings that are presented by the business and should ensure that those are as
per to the GAAP.
The present law of corporate criminal Sections in the United Kingdom (Abdullah, and
Said, 2019). It is a well establish standard that a business is known as a separate legal entity and
is measured a legal respective abstracted to those performance in the business. The management
might not there for be accountable their crimes that are committed by respective cleaning to act
in their name. By identifying whether a management is at fault of a crime that rely on the
building of the offence and on the path through which for any crime corporate criminal liability
can be identified. In present year two essential parts of statute law have required to subdue the
historical trouble in creating corporal liability by developing certain corporate offence.
 Corporate manslaughter (Corporate Manslaughter and Corporate Homicide Act 2007).
 Failure to prevent bribery (Bribery Act 2010). For most another offences, considering all
of those to which DPAs will employ, there are two legal rules by which a company can
be charged for condemnable offences (Baskaran, and et.al., 2020).
 Vicarious obligation, which applies mainly to offense where there is no requisite to prove
any intellectual component.
 Non-vicarious obligation, that can refer below the "identification principle" to offense
that consider a rational factor (such as intent, dishonesty or knowledge) inside their
explanation.
The principle of identification states that only the actions and attitudes of those who
represent the leadership and will of the company can be attributed to the company. This principle
must be met in order to demonstrate the spiritual element of criminal offenses against the
company. In the past, it has proved to be a hurdle that has often prevented businesses from being
held accountable for the behaviour of the people who work there. The 1915 case of Leonard v.
Asia Oil [1915] AC705 found that the spiritual element of a crime must be attributed to "the
company's leadership and will" in order to establish the company's criminal liability (De Haas,
2021).

Legislative Consequences
WorldCom scandal might effectively have quotient US GAAP managing agitating the
statement in which the fake scammers can only have followed by lacking of principles. Hence,
there is a wider agreement in which the word come tragedy was slightly Tum to BA disaster of
corporate governance. By managing the failure of Enron, the security is an dealing committee
had not effectively passed any fresh regulation. On the other hand after the superior
administration of WorldCom was accused with crime, the assembly was pressed to response the
opponents by law-makers activities (Staffler, 2022). Therefore a new US federal rule the
Sarbanes - Oxley Act (SOX) raised in the year of 2002. It now followed to any management that
recorded with the SEC and involve 11 units that agree their certain liabilities with the issue of
corporate governance compliments and as well as revelation.
In respect to the detail that at word, associates of the elder administration have been
include in the crime, chief executive officer and chief financial officer can now be effectively
and respectively be believed for accounting their liability of fiscal statement. Furthermore, it is
no effectively enable to of a recognition to their executive or officers at the Worldcom did to
Ebbers. By managing the dealings to the reviewing management it involves courses that stipulate
audit organisations that can't offer any extra facilities that might deal their independence and
accountants will not have any magnet which can be e include in organisational decision. After
this a new auditor repetition system that need audit associate to change every five years in audit
management every seven years effectively has been imposed.
The most dishonourable division of the SOX is section 404 that need the execution and
periodic assessment of an inner auditing scheme and it has become the fundamental supplier to
maximise compliance value (Stjern, and Manger, 2020). After their introduction management
have spent millions of bucks to fulfil with the new rules that have maximized responsibilities but
as opponent says that it also so difficult invention. It can also be understood that to be partial and
as overloaded with small listed management with same cost compliance value take an effective
share of their turnover and lead high term of management the listing and some listing as well. In
the United Kingdom where lighter point on administration have been executed.
In Europe the response to the word com business standard of the US involve the
execution of the obligatory 'yearly corporal governance evidence'. The company act 2006, has
substituted the memo and article of association with respective piece of writing that maintain by

the efforts to reduce the time period on data transportation for small management from 10 to 7
months after the financial year end (Ünvan, 2020). Modification of the agreement of duties of
director also manages with the functioning and financial statement that being presented for larger
management.
CONCLUSION
From the above mentioned report it has been concluded that, the fraud of Worldcom become
exclusive in June 25, 2002. Various actions had followed to manage the assurance of the public
on the management. The committee of director were replaced common new self-directed auditor
was recruited, stock choices were eliminated, new to principal schedule was executed and so on.
Also several terms of thousands of employees were let go. The effective impact was on the
stockholders of the business of management.

REFERENCES
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