In this video, learn about the catastrophic consequences that can arise when internal controls are lax or are ignored. This will impact the integrity of the financial statement.
- At its pinnacle, WorldCom was a telecom giant worth $180 billion. - Just two years later, in July 2002, the company declared bankruptcy. - For at least a year before the bankruptcy, WorldCom's accounts were covering up the company's disintegrating profitability. - At a hearing subsequent to the bankruptcy, one of WorldCom's accountants testified that he was instructed by his superiors, on a quarterly basis, to falsely report lower costs and increase WorldCom's reported profits in order to hide the company's problems from investors. - Now the WorldCom case is a poster child for the catastrophic consequences that can arise when internal controls are lax or are ignored. - Until 2002, WorldCom appeared to be one of the greatest corporate success stories ever. - It all started in 1983, when a group of partners met in a coffee shop in Hattiesburg, Mississippi, and sketched out on a napkin their idea for a long-distance telephone company. - [Instructor] Soon after, their company, LDDS, Long Distance Discount Service, began providing phone service. For 15 years, the company grew quickly through acquisitions and mergers. - [Instructor] Bernie Ebbers was named CEO in 1985. And the company went public in August of 1989. The company's $40 billion merger with MCI in 1998 was the largest corporate merger in history at the time. The combined company ultimately took the name WorldCom. - In 1999, WorldCom CEO Bernie Ebbers was listed by Forbes Magazine as one of the richest people in the United States. - In October 1999, WorldCom attempted to purchase Sprint for $129 billion in stock and debt. The merged companies would've formed the largest telecommunications company in the United States. - The merger was vetoed by the Department of Justice over antitrust concerns, but even without the Sprint merger, by 1999 WorldCom owned a third of all United States data cables, which handled over 50% of all U.S. internet traffic. - However, behind the scenes, the success of the company began to unravel with the accumulation of debt and expenses, the bursting of the internet bubble in the stock market, and drops in phone service rates and revenues. - Because of aggressive financial statement fraud, it would take nearly two years for the extent of WorldCom's problems to become public. - [Instructor] There were several different types of financial statement fraud committed by WorldCom, with by far the largest being the manipulation of expenses and assets. WorldCom admitted that it concealed over $9 billion in expenses. - WorldCom's accountants recorded current operating costs as assets, pushing those operating costs into the future, and giving the impression of high current profits. - This WorldCom accounting fraud started to unravel when some tips were provided to the company's internal auditors. - At the same time, the U.S. Securities and Exchange Commission, the SEC, started an investigation into WorldCom's profitability, wondering how WorldCom could be so profitable at the same time other telecom companies were losing money. - A WorldCom accountant subsequently testified that he and the company's chief financial officer, the CFO, worked backwards each quarter, using the numbers expected by Wall Street analysts to decide how much to manipulate WorldCom's reported numbers to match those expectations. - When this financial statement fraud was publicly revealed, the consequences were swift and terrible. - [Instructor] WorldCom declared bankruptcy, wiping out the value of the investments of all the shareholders. - [Instructor] The CFO was sentenced to five years in prison. The CEO, Bernie Ebbers, was sentenced to 25 years in prison! The earliest Mr. Ebbers can be released from prison is July 2028, when he will be 86 years old. - In retrospect, it would've been much better for the CFO and the CEO of WorldCom if the company's internal controls had been tight enough to prevent them from yielding to temptation to manipulate the reported accounting numbers.
Note: This course does not satisfy compliance training requirements for SOX.
- Common problems in financial statements
- Segregating duties and physical controls
- Conducting independent checks
- Earnings management
- Sarbanes-Oxley requirements
- Internal vs. external auditing
- How the SEC regulates financial documentation