Group Members

PRESENTATION TOPIC

WorldCom & Enron

Introduction to Enron

Continued.

 Special

Purpose Entities

Created many SPEs.

Revenue

Recognition

Used Merchants model for reporting

Market

to Market accounting

Not valued assets on Historic costs

INTRODUCTION TO WORLDCOM

In 1983 partners led by former basketball coach Bernard Ebbers, sketched out their idea .
o

For 15 years it grew quickly through acquisitions and mergers. Bernard Ebbers was named CEO in 1985. The company went public in Aug. 1989. Its $40 billion merger with MCI (Microwave Communications Incorporated) in 1998 was the largest in history at the time. Stock Prices reached to 64.51$ in 1999. In 1999, the telecommunications industry began to slow down and WorldCom's stock was declining.

CONTINUED.

To cover margin calls, beginning in 1999 and continuing through May 2002, WorldCom used shady accounting methods. WorldCom, the No. 2 U.S. long-distance telephone and data-services provider, announces on June 25 that it would have to revise its recent financial statements to the tune of $3.85 billion. The $2.6 billion loan WorldCom recently received from 27 banks is unsecured, meaning the lenders would have a claim on WorldCom's assets in the event of a bankruptcy filing. Unfortunately, the 17,000 WorldCom employees who had lost jobs became ready to loose retirement funds as well because of bankruptcy. Bernard Ebbers sentenced 25 years of prison for such fraud.

HOW FRAUD WAS DISCOVERED

The first discovery of illegal activity was by WorldCom's own internal audit department who uncovered $3.8 b. of the fraud in June 2002. In July 2002, major accounting errors that hid vast amounts of debt led WorldCom to file bankruptcy. The telecommunications giant faced increasing problems up to that point, but investors were unaware of the company's demise because of the accounting creativity and intentional cover-ups. Some former top executives of WorldCom have been accused of altering transaction and account records to conceal company debt; several have admitted wrongdoing so far. The Securities and Exchange Commission (SEC) launched an investigation. By the end of 2003, it was estimated that the company's total assets had been inflated by around $11 billion.

HOW FRAUD WAS COMMITTED

The fraud was accomplished in two main ways.

First, WorldCom's accounting department underreported line costs (expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them.

Second, the company inflated revenues with bogus accounting entries from corporate unallocated revenue accounts.

RECOMMENDATION

Enron should have changed their CEO, when the BoD came to know about the fraud.
WorldCom could have been saved if they would have not declared bankruptcy. The companies should have moved towards acquisition of other companies but they should have first merged with them and after sometime when they would have earned fair profit, they should have moved towards acquiring those companies.

CONCLUSION

Greed is Curse.
Enron and WorldCom were companies which were impatient and they became greedy and thought that they would be able to get away with the frauds that they commit.

Even if the companies had chosen creative accounting techniques, they could have gotten away with it. But if they would have waited for some time.