BERLIN SCHOOL ECONOMICS AND LAW

BANKING ACADEMY OF VIETNAM

----------

TERM PAPER

M.A. FINANCIAL AND MANAGERIAL ACCOUNTING

CLASS
Guider: Prof.Dr. Rainer
Stachuletz

Hanoi, 02 2012

Group 2:
Hoang Linh Chi
Pham Thu Hien
Doan Thu Nga
Tran Anh Quang
Pham To Quyen

TABLE OF CONTENT
A Introduction.........1
B Literature Review.........1
C Result....2
D Discussion ..2
I. Company back ground and development periods...2
1. Company background...2
2. Development periods2
2.1.

Early stage of development..2

2.2.

Pre-bankruptcy Circumstance...3

2.3.

Going to bankruptcy (2002)..5

2.4.

Effect on shareholder, creditor, employees...7

II. Causes to huge loss.................................8

1.1.

External..8

1.2.

Internal...........................................................9

III. Fraudulent activities10

1. Accounting frauds...10
1.1.
Reducing line costs....11
1.2.
Inflating revenue13
2. Corruption and bribery.14
2.1
Relationship with Arthur Andersen...14
2.2
Relationship with SSB (Salomon Smith Barney an investment banking operation
of Citigroup) and securities analyst15
2.3
Relationship with Politician....16
IV. Market weaknesses based on Efficient Market Hypothesis.16
V. Recommendations from WorldCom scandal Practical lessons for Vietnamese
companies17
1. The Sarbanes Oxley - Potential Governance.17
2. Policies of Government.18
3. Responsibility of the State Securities Commission of Vietnam (SSC).18
4. Audit quality..19
E Conclusion.19

Appendix (References).20

A INTRODUCTION
It is a common topic that why we need accounting. Asking that question of an accountant is like
asking a farmer why we need rain. Accounting is needed because it is the only way for business to
grow and flourish and financial reports are considered as an instrument to publish business
activities of company. Nonetheless, there are more and more corporations used that instrument to
conceal their loss and defraud investors. The case of Worldcom in 2002 is a clear proof. It was
known as one of the largest bankruptcies in the American history which involves in finance.
Worldcom made fraudulent financial statements by creative accounting tactics so as to deceive the
loss inside company. Besides, creating non-transparent relationships with outsiders provided
considerable support and protection to its development. Worldcom was such a powerful
corporation that people hardly believed it could be collapsed. On 19 July 2002, it declared
bankruptcy. Then an interesting question posed: Why did the giant collapse? - Accounting
problems or market weaknesses? which all lead us to conduct a secondary research. In this term
paper, analyses are given in details of the company background and its development periods,
reasons to huge loss and fraudulent activities. Some lessons from this case for Vietnamese
companies are added in the last part.

B - LITERATURE REVIEW
July 2002 witnessed Worldcoms filing for bankruptcy protection. This bankruptcy valued at
$103.9 billion. Former WorldCom CEO, Bernie Ebbers, was sentenced to 25 years in prison on
charge of securities fraud and cooking the books. WorldCom has collapsed; it made the U.S.
economy lose around $10 billion, more than 20,000 people unemployed and created a chain
reaction as the share prices of competitors in telecommunications industry had dropped down.
There have already been numerous articles, studies about the collapse of Worldcom. However,
those researches generally focused on fraudulent activities in details that did not give an overall
look from outside to inside enterprise, from outside in the market to inside in the business. In this
paper, external and internal factors leading to its huge loss first is demonstrated. Clear
explanations of activities of accounting frauds, corruption and bribery to hide bad performance are

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shown. Remarkably, Efficient Market Hypothesis is applied to analyze the case from a broader
viewpoint for the overall market. From that, lessons for Vietnam are strongly recommended.

C - RESULT
After conducting this secondary research, those are specified in some categories following.
Worldcom showed a brilliant operational and financial performance to the public, however in the
fact their business activities was going down for external and internal causes which are increasing
market competitiveness, changing customer demands and poor corporate governance. Worldcom
deceived it losses by treating line costs and revenue improperly. Specifically, from the first quarter
of 1999 to the first quarter 2002, over $7 billion of line costs was reduced by releasing accruals
and capitalizing operating expenses. In addition, revenue was overstated by over $2.6 billion by
using management tool known as Corporation Unallocated schedule belonging to MonRev Report.
It is found Worldcom bribed its auditor, investment bank, finance analyst and politicians. Also,
Efficient Market Hypothesis stated three forms with different features is exploited adequately to
supply theoretical base for broader market analysis.

D. DISCUSSION
I. Company background and development periods
1. Company background
Long Distance Discount Service (LLDS) was established in 1983 in Mississippi by Bernard
Ebbers and operated as a long-distance reseller, primarily for AT&T Co. Mr. Ebbers who that later
created WorldCom Empire, was born in Edmonton, Canada. He attended Mississippi College on
a basketball scholarship and graduated in 1967 with a degree in physical education. At beginning,
the company obtained a $650,000 loan from a local bank to buy a computer switch to route longdistance calls. Because AT&T was under court order to lease its phone lines cheaply to start up
companies, LDDS could offer cut rates to small businesses and residents. In 1984, the Company
had annual revenues of approximately $1 million.

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2. Development periods
2.1. Early stage of development
Mr. Ebbers was selected to become CEO in 1985 with some senior personnel namely Scott
Sullivan as Chief Financial Officer, David Myers as Senior Vice-President and Controller.
Under execution of CEO Ebbers, the company grew well, instituted the growth strategy by
purchasing its regional rivals. In addition, he exercised diversification strategy to drive the
company move away from its original business and forwarded to new potential areas such as data
transmission, e-commercial, wireless services and internet. In 1989, LDDS went public through
the acquisition of Advantage Companies, Inc. From 1998 to 2002, the company took place merger
and acquisition of 35 companies by almost share-based payments. In 1995, by taking over WilTel,
it stepped into voice and data areas and changed its name to WorldCom. One year later, WorldCom
acquired MFS, an Internet-access provider for businesses, in a big deal valued at $14 billion. In
the next business, WorldCom and MCI successfully combined, creating a record merger in history
at that time. Then, they continued this strategy by proposing a merger with Sprint, a huge wireless
service company; however, it was blocked by The Department of Justice due to probable harm to
competition in telecommunications markets.

2.2. Pre-bankruptcy Circumstance

Along with the development of the world and United States (US) economy, US telecommunication
industry had an extreme growth in 1990s by booming telephone, e-commercial, internet and data
services. By merger and acquisition, WorldCom grew up rapidly, not only in terms of more market
share, client, turnover but also reputation and stature to the company and CEO Ebbers. WorldCom
became the second biggest telecommunications services company in US after AT&T; it played the
second largest long distance carrier and the leading internet service supplier role. Its share price
rose remarkably in overall 1990s and was a powerful currency for further acquisitions as can be
seen as table below.

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Figure 1: Worlcom Daily Closing Stock Prices per share (1990-1993) and Quarterly
Revenues and Price per share 1Q94-3Q99
WorldComs revenue was growing gradually in many consecutive years and significantly in
the last of 1990s. It reached the peak at 63.5 dollars per share on Jun 18, 1999 and announced
turnover of 3,874 million dollars in 2000. At the time of its maximum share price in 1999, the
giant telecommunications WorldCom was valued at $180 billion and employed over 80,000
people, and Bernard Ebbers laid claim to a personal fortune of just over $1.4 billion.

Financial Highlights

1994

1999

2001

$2.2

$37.1 $35.2

($ in billions)
Revenues
Total Assets

$3.4

$91.1 $103.9

Employees (in 000's)

7.5

97.6

87.8

Total Capitalization

$4.1

$163.6

$72.8

Table 1: Overview of WorldCom

(Source: Original SEC Filings , before restatements for accounting fraud)

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With giant growth, WorldCom quickly became top wing of NASDAQ stock exchange and ranked
42nd on the Fortune 500. Merger and acquisition brought huge market share with millions of
clients, which spread over wide regions. An anti-monopoly report showed that, WorldCom could
dominate Internet and data services. About internet infrastructure, over half of Internet service
providers would receive a backbone connection through a merged WorldCom/MCI. It was
estimated that 62% of Internet revenue generated by Internet providers would be derived from
connections through WorldCom/MCI. Overall Internet revenues for the combined WorldCom-MCI
were at least $1.5 billion.
WorldCom seemed to gain high prestige with partners, investors, banks and government. It got
credit from about 30 big banks. It also closely related to politicians, Whitehouse and engaged in
big contracts from US government and army. AT&T and Sprint, two major competitors, had
experienced reduction in market share, whereas WorldCom had considerably stepped in fast
growth in many years. Moreover, there were a large number of companies attending this industry.
(MCI

is

the

major

part

of

WorldCom)

Figure 2: Market Shares and Market Shares growth of Worldcom, ATT, Sprint (1998-2001)

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2.3. Going to bankruptcy (2002)

March 11

Worldcom received a request for information from the U.S. Securities and Exchange
Commission relating to accounting procedures and loans to officers

April 22-23

Standard and Poor , Moodys Investor Service and Fitch cut WorldCom's long-term
and short-term corporate credit ratings.

April 30

CEO resigned when slumping share prices and SEC probed his personal loans. New
CE0 John Sidgmore was assigned.

May 15

WorldCom said it would draw down a $2.65 billion bank credit line as it negotiates
for a new $5 billion funding pact with its lenders

June 5

WorldCom announced it would exit the wireless resale business and cut jobs to
reduce expenses and pare massive debts.

June 25

WorldCom fired CFO after uncovering improper accounting of $3.8 billion in

expenses over five quarters starting in 2001. The company also said it will cut 17,000
jobs, or 20% of its work force.

June 26

SEC filed civil fraud charges against WorldCom and seek an order to prevent the
company from disposing of assets, destroying documents and making extraordinary
payments to senior officers.
NASDAQ market halted trading its two tracking stocks. Shares of Worldcom felt low
as 9 cents before the halt.

July 2

WorldCom is working on funding proposals with its lenders to stave off bankruptcy.

July 8

CEO Ebbers and Ex-CFO Sullivan said they did nothing wrong and refused to
answer questions.

July 17

Company agreed to freeze some assets for 80 days.

July 21

Worldcom filed for Chapter 11 bankruptcy protection but planned to emerge within 9
to 12 months. Additionally the company would hire a restructuring expert.

2.4. Effect on shareholder , creditor, employees

2.4.1. Shareholders

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Until the case was resolved, WorldCom's stock plummeted from more than 64 USD / 1 stock to
just over $ 1, it made the company's shareholders lost about $ 180 billion. In addition, Worlcom
bankruptcy made the shares price of many other carriers also dropped down.

2.4.2. Creditors
It is estimated that Worldcom was in bank debt of approximately $ 4.5 billion. Three companies JP
Morgan, Citigroup and Bank of America suffered great losses from the WorldCom fraud.
According to initial figures, about 60 other banks in the world (especially in the UK, Canada, Italy
and the Netherlands) had borrowed or received a part of Worldcoms debt in the form of bonds.
Citigroup: $ 375 million
Mellon(US): $ 100 million
Barclays (US): $ 100 million
Aegon (Poland): $ 200 million
ABN Amro: approximated $ 100 million
Allianz (Germany) approximated $200 million

2. 4. 3. Employees
More than 22,000 Worldcom employees lost their jobs. Initially, these laid-off workers were left
with nothing, even as the new Worldcom Board agreed to pay its new CEO $20 million over 3
years.

2.4.4. Competitors
Worldcoms bankruptcy had a dominant contagion effect for competitor. Overcapacity and other
adverse trend had created a generally unstable environment in the industry.

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Stock price of competitors declined because the bankruptcy of a giant revealed a negative signal
about industry assets values and future prospects.

2.4.5. Others
State and local governments had been forced to make up for these losses by cutting vital public
services. According to New York State Comptroller Alan Hevesi, police officers, fire- fighters,
teachers and other public servants have lost their jobs and public services have been diminished
throughout New York State because of these financial losses.
Public pensions and Talf-Hart-ley funds lost at least $70 billion. Public funds in almost every State
suffered staggering losses, $ 1.2 billion in California, $ 393 million in New York, $ 277 million in
Texas, $23 million in Utah.

II. Causes to huge loss

The companys problems started with the dot-com bubble burst and following reduced demand on
infrastructure when it had the vast oversupply in telecommunications. The revenue had fallen while
debt taken on to finance mergers and infrastructure investment remained. Ultimately, the market
value of the companys common stock plunged from about $180 billion in January 2000. This huge
loss was caused by external and internal factors:

1. External
During 1999, telecommunications industry analysts believed that growth rates for data traffic
would outpace growth rates in voice traffic, and that Internet usage would create increased demand
for broadband capacity. Some analysts also expressed concerns about both WorldCom s
weakness in wireless technologies and its exposure to declining prices for long distance
services.
Conditions in the telecommunications marketplace became increasingly difficult in 2000 along with
a change in customers demand. The media companies were entering the long distance market, long
distance carriers were entering the local call market, and many companies were going after the data
revenues associated with the Internet boom. Competition was extremely vigorous, and a number of
the competitors including incumbent local telephone companies were strong.
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Industry conditions worsened in 2001.

The number of competitive local telephone companies

in operation dropped to 150 from 330 the previous year, and long distance carriers lost pricing
power and market share to the media companies and other local telephone companies. Many
companies had entered the market for Internet services in the late 1990s, and the resulting
expansion in network capacity led to a glut in the market. Forecasts began to emerge in 2001
showing that supply would significantly exceed demand through 2003-2005, thus industry revenues
and stock prices plummeted.
Worldcoms system infrastructure did not meet the change in market demand. Consequently,
revenue of the business went down.

2. Internal
WorldCom s collapse reflected not only a external but also a major failure of corporate
governance. The Board of Directors, though apparently are aware of external, played far too small
role in the life, direction and culture of the Company.
The outside Directors had little or no involvement in the Company s business other than
through attendance at Board meetings. Nearly all of the Directors were legacies of companies
that WorldCom, under Ebbers s leadership, had acquired. They had ceded leadership to Ebbers
when their companies were acquired, and in some cases their roles were diminished. Ebbers
controlled the Boards agenda, discussions and decisions.
Ebbers was autocratic in his dealings with the Board, and the Board permitted it. With limited
exceptions, the members of the Board were reluctant to challenge Ebbers even when they disagreed
with him. Like most observers, they were impressed with the companys growth and Ebbers
eputation, although they were in some cases mystified or perplexed by his style. There is no doubt
that Worldcom was Ebbers company. The members of the Board were deferential to Ebbers and
passive in their oversight until April 2002.
The outside Directors had virtually no interaction with Company operational or financial
employees other than during the presentations they heard at meetings. While in this respect the
Directors were far from unique among directors of large corporations, this lack of contact meant
that they had little sense of the culture within the Company, or awareness of issues other than
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those brought to them by a few senior managers.

They were not themselves visible to

employees, and there were no systems in place that could have encouraged employees to contact
with concerns about either the accounting entries or operational matters.

In short, the

Board was removed and detached from the operations of WorldCom to the extent that its
members had little sense of what was really going on within the Company.
WorldCom and Sprint had agreed to merge in a deal valued at $115 billion on October 5,
1999. It would gain Sprint s PCS wireless business, as well as long distance and local calling
operations. However, the Antitrust Division of the United States Department of Justice refused to
approve the Sprint merger on terms acceptable to WorldCom and Sprint, and the companies
officially terminated their discussions on July 13, 2000. The termination of this merger was a
significant event in WorldComs history. It was perceived to mean that large-scale mergers were no
longer a viable means of expanding the business.
Even after the failed Sprint merger, Ebbers continued to'' shopping''. September 2000, WorldCom
bought Intermedia Communications Inc., an Internet phone company is in trouble, with $1.6
billion. Intermedia had a controlling stake in Digex, operating Web sites for business.
For some managers, they show that Ebbers had been lost. '' It was agreed the most stupid of all
time'', they said. '' We spent $ 1.6 billion to buy a company that only cost $ 50 million.'' However,
they did nothing to stop it.
The organizational structure was not reasonable, poor management capacity and bad decisions in
the administration were also in causes of Worlcom losses.
The deference of the Compensation Committee and the Board to Ebbers is illustrated by their
decisions beginning in September 2000 to authorize corporate loans and guaranties that grew
to over $400 million, which he borrowed money to bet on the shares of WorldCom. Mr. Ebbers
actually transferred the loan to personal property, including a company that sold sports boat, a
soybean farm and nearly 27 million shares of WorldCom. Hence, managers did not manage shares,
a large amount in the hands of Ebbers, causing negative impacts on the general development.

III. Fraudulent activities

1. Accounting frauds

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In attempt to hide its huge loss, Worldcom intentionally applied creative accounting in cooking
income mainly by reducing line costs and inflating revenue.

1.1. Reducing line costs

It was discovered on statement on 25 June 2002 that Worldcom has made improper classification
of 3.852 billion for line costs as capital expenditures in balance sheet rather than current expenses
in income statement. As can be seen from the table below, the company deliberately decreased
reported line costs by over $7 billion:
Table 2: Improper adjustments to line costs (millions of dollars)
1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 Total
(41) 103 140 396 493 683 832 862 771 606 744 942 798 7,329
Line costs are what Worldcom pays outside service providers for using their telecommunication
networks, which are access fees and transportation charges for messages. An example, a call from
Worldcom customers from California to Paris starts from California phone companys line, then
flow to Worldcoms own networks, and ends by getting passed to a French phone company.
Worldcom has to pay both the local California phone company and the French provider. The above
are line costs, Worldcoms largest single expense, occupying a half of the companys total expense
from 1999 to 2001. It was in a common discussion for management to be kept down in level and
trend.
Worldcom laid emphasis on one key measure of line costs to the public is line cost E/R ratio, the
ratio of line cost expense to revenue, which is aimed to be remained at the level of 42%.
The improper accounting practices to reduce line costs took two main forms: release of accruals in
1999 and 2000 and then, when the accruals have been used up, capitalization of operating line
costs in 2001 and early 2002.

1.1.1. Release of accruals

Accruals, a liability account on balance sheet, were amounts that had been reserved to fulfill its
obligation to pay anticipated bills. Based on estimates which are difficult to make with precision,
Worldcom may re-evaluate them periodically to see whether they are at appropriate levels. As
proper accounting process, if actual bills are running higher than estimated amount, the accruals
should be increased. In contrast, if they are lower, they should be decreased, or released.
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Because charges from its outside service providers are recognized lower than estimated, then
release of accruals are made, simultaneously set off against reported line costs and pre-tax income
becomes larger. An example, if an accruals of $100 million is established in the first period, $92
million is charged in fact, then in the second period, the excess amount of $8million will be
released, reported line costs reduced by $8million and pre-tax income increased by $8million for
that period.
The process of releasing accruals is made in three different ways:
i.

It released without any evidence of whether the company actually had excess
accruals amount or not, normally came from top-level instruction.

ii.

It did not release actual excess accruals in the period they were identified, however
kept them until bad period.

iii.

It released accruals that had been established for other purposes

In 1999 and 2000, inappropriate accrual releases reduced reported international, United Kingdom
and domestic line costs for a total of approximately $3.3 billion:
Table 3: Reductions to line costs from accrual releases (millions of dollars)
Line Costs
Domestic
International
UK
Other
Total

2Q99
40
----

3Q99
100
31
---

40

4Q99
90
239
---

131

1Q00
2Q00
3Q00
4Q00
89
305
828
477
370
374 -170
34 ------150
329
493
679
828
797

TOTAL
1,929
1,184
34
150
3,297

1.1.2. Capitalization of line costs

Line costs were ongoing and operating expenses that should be recognized immediately and set
off against revenue on income statement. Worldcom capitalized certain of its operating line costs
as capital expenditures_ asset accounts on balance sheet _ then when put in service; they are
depreciated gradually, or spread, over time. As a result, current income was exaggerated and the
time these costs offset revenue was postponed.

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From the first quarter of 2001 to the first quarter 2002, approximately $3.5billion of operating
expenses were capitalized and $377 million were improperly adjusted additionally in order to
reduce line costs during this period by a total of 3.883 billion.
Table 4: Reductions to Line Costs by Capitalization and Other Adjustments
(millions of dollars)
1Q01 2Q01 3Q01 4Q01 1Q02 Total
Capitalization
544
560
743
841
818 3,506
Other Adjustments
227
50
-100
-377
Total
771
610
743
941
818 3,883
An illustration for line costs capitalization can be described, in the first quarter 2001, on April 20,
to reduce line costs by $771 million, placement of $629 million into Other long term assets and
$142 million into Construction in Progress account were made. On April 23 and 24, $402 million
from Other long term assets are transferred to Construction in progress account, increased total
amount of Construction in Progress account to $544 million. The remaining $227 million was
offset by accrual release from liability account. As a result, $771 million of line costs was
decreased and $ 544 million was capitalized in violation of accounting standards in Construction
in progress account, led to a line cost E/R ratio of 42% rather than 50%.

1.2. Inflating revenue

From the first quarter of 1999 to the first quarter of j2002, $958 million was the the identified
amount of improperly recorded revenue, reflected Worldcoms sustainable growth.
Table 5: Improper Revenue entries (millions of dollars)
1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 Total
85
5
65
50
19
121 161 27
17
132 117
92
67
958
Additional $1.107 billion of revenue items during this period had been questioned, due to lack of
adequate support.
Table 6: Questionable Revenue Entries (millions of dollars)
1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 Total
26
89
65
67
88
115
99
95
88
68
158 107 42 1,107

1.2.1. Revenue management instrument

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The principal instrument by which Worldcom managed revenue performance was MonRev, a
monthly report monitored by Revenue Accounting group, including an important part, Corporation
Unallocated schedule. It reflected certain items that credit could not be offered for individual sales
channel, such as revenue from sale of a corporate asset, a change of accounting policy for a
contract. It was remarkable because most questionable entries were booked to this account and
those only appeared in quarter-ending month, the week after the quarter ended.

1.2.2. Some specific revenue items

a. Minimum Deficiency Reserves
Minimum Deficiency charges occur from customer agreement which allow telecommunications
company to bill customers for usage amounts lower than agreed minimum. However, it was found
that Worldcom infrequently collected them.
In general, Worldcom reserved nearly 100% of the billings, accumulation of reserve balance was
substantial. Then the total amount reached $180 million in the second quarter of 2000 that fall
below revenue target of $195 billion. As instructed, three separate journal entries were booked to
release approximately $100 million, thus making up the difference between reality and target.
As investigated, for the period from the fourth quarter of 1999 to fourth quarter of 2001, $312
million in revenue were overstated on Minimum Deficiency Reserves account

b. Customer credits
There is a common practice that telecommunications companies issue credits to customers for
incorrect or overbilled amounts, especially when customers face up with installation or disruption
problems. Those credits can be in the form of discounts of future billings or adjustments to
previously issued invoices, which decrease revenue amount.
Prior to second quarter of 2001, Worldcom has recorded customer credits as contra-revenue
account, which reduced revenue following proper accounting standards. However, from second
quarter of 2001, the amount was reclassified to bad debt expense which did not have effect of
reducing revenue.
Applying this theory, $215 million of customer credits was treated inappropriately between the
second quarter of 2001 and the first quarter of 2002.
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2. Corruption and bribery

2.1. Relationship with Arthur Andersen
Serving as WorldComs independent auditor from at least 1990 through April 2002, Andersen and
WorldCom developed a close, long-term business relationship. In its year 2000 Audit Proposal,
Andersen stated that it considered WorldCom as a flagship client and a Crown jewel of its
firm. In term of the total amount of fees charged to clients, WorldCom was one of the Andersens
top 20 engagements in 2000, and the largest client of its Jackson office, Mississippi. From 1999
through 2001, WorldCom paid Andersen $7.8 million in fees to audit the financial statement of
WorldCom, Inc.; $6.6 million for other audits required by law in other countries; and about $50
million for consulting, litigation support and tax services. Andersens staff had the equivalent of
approximately 10 to 12 people working full- time auditing WorldComs books. For its 2001 audit,
Andersens team spent roughly 15,000 hours on the audit and charged $ 2 million.
By contrast, the Arthur Andersen work papers that support its audit opinions on the financial
statements of the Company for 1999, 2000 and 2001, concluded that WorldCom was a maximum
risk client. Moreover, Andersen apparently accepted without complaint to the Audit Committee
that WorldCom managements refusal of its repeated requests for access to the computerized
version of the General Ledger, which showed the inappropriate on-top adjustments. What is more,
there are several obvious evidences of WorldCom Managements treatment of Andersen and
withholding information from Andersen. And, though awareness of the restrictions imposed on its
access to information, Andersen acquiesced instead informing the Audit Committee about this lack
of cooperation.

2.2. Relationship with SSB (Salomon Smith Barney an investment banking

operation of Citigroup) and securities analyst
SSB and its predecessors collectively received more engagements from WorldCom than any other
investment banking firms in a long period, with more than $107 million earnings on
approximately 23 investment banking deals.
SSB and its predecessors also allocated millions of dollar of valuable IPOs to a number of
WorldCom directors, including Mr. Ebbers and Scott Sullivan, who in turn sold these shares for a

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considerable profit of more than $18 million. These IPO shares had influence on the decision of
WorldCom executives to choose SSB as its investment banking firm.
Mr. Jack Grubman, Salomon Smith Barney s telecommunication analyst, repeatedly gave
WorldComs stock highest ratings, enthusiastically urged investors to purchase WorldComs
shares, even at that time he was advising

WorldCom management on business strategy,

acquisitions and investor relations.

2.3. Relationship with Politicians

WorldCom, like so many other corporations under investigation for duping investors, enjoyed
considerable access to politicians of both parties and gladly spread its money around to keep the
doors of power wide open.
Since the beginning of 2000, WorldCom has contributed more than $1 million to candidates,
about half to Republicans, half to Democrats. It has paid much more for a stable of lobbyists who
promote the company's views on Capitol Hill and at the White House. WorldCom also lobbied
policymakers for an edge in the lucrative high-speed Internet market, contributed $100,000 to
Republican fundraising gala featuring President Bush -- enough to be listed on the program as a
vice chairman of the event. WorldCom, which has also sought tax breaks and other assistance, has
been a top contributor to its hometown congressman, Charles W. "Chip" Pickering Jr. (R-Miss.),
and once gave $1 million to the University of Mississippi's Trent Lott Leadership Institute, named
in honor of the Senate's top Republican. As recently as one week before it revealed it had lied
about its earnings, WorldCom Inc. was still trying to influence politicians in town.

IV. Market weaknesses based on Efficient Market Hypothesis

From the analysis above, it is convinced that Worldcom had tried to conceal its overall
performance failure by accounting frauds, which is by the way of capitalizing line costs and
overstating earnings. Besides, it developed a non-transparent relationship with Arthur Andersen in
order to solely get financial statement audited by a large and reputed auditor. Ethical issues
became worsen when it bribed investment banking firm, market analyst to get highest rating for its
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stock. The company sank deeper into morass of corruption by corrupting politicians, White House.
By doing this, corporate image was enhanced and the company enjoyed a higher level of
protection from the politicians. Those fraudulent activities to hide insider information on its
affairs, operations, or financial position caused an information imbalance between company
management, auditor, analyst and public. Then, the apparent effect is that share price is
overvalued.
An important finance theory needs demonstrating in this paper is Efficient Market Hypothesis.
This theory provides analytical base for market with three forms: strong, semi-strong and weak.
The strong form claims that prices on traded assets instantly reflect past information, current
information, even insider information. The semi-strong states that prices reflect all publicly
available information. The weak form said prices already reflect all past publicly available
information, and no insider information included. Also, it is impossible to use price information of
the past to forecast future prices to earn superior return.
Based on this theory, Worldcom case can be continued analyzing in a broader view. Worldcoms
share price reflected past information already, however no insider information. Investors could not
predict its future prices from listed price due to information imbalance.

By that it can be

concluded that the market was in the weak form efficiency. Apparently, investors at that time had
to suffer from big loss when its share price dropped down drastically from $64 to $1.

V. Recommendations from WorldCom scandal Practical lessons for Vietnamese

companies
1. The Sarbanes-Oxley Act Potential Governance
The Sarbanes-Oxley Act (official name is the Public Company Accounting Reform and Investor
Protection Act), also known as Sarbanes-Oxley, Sarbox or SOX, was enacted in 2002 to protect
investors from corporate accounting fraud. The bill contains 11 titles, ranging from additional
corporate board responsibilities to criminal penalties. The act also covers issues such as auditor
independence, corporate governance, internal control assessment and financial disclosure.
Followings are the major provisions of the act:
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Chief executives and financial officers are held responsible for their public companies
financial reports. They have to sign on and assure the accuracy and reliability of these
reports. Longer jail sentences and larger fines are now imposed on executives who
intentionally misstate financial statements.

Executive officers and directors may not solicit or accept loans from their companies.

Disclosure of executive compensation and profits is mandatory.

Internal audits as well as review and certification of audits by outside auditors are
mandatory.

There will be criminal and civil penalties for securities violations.

Audit firms may no longer provide actuarial, legal, or consulting services to firms they
audit.

Publicly traded companies must establish internal financial controls and have those
controls audited annually by an independent auditor.

There is no doubt that it is necessary for Vietnam to have a similar Act like The Sarbanes-Oxley
Act, so as to limit the deficiencies of transparency and accounting frauds of companies financial
reports.

2. Policies of Government
It is fundamental to implement tightened policies against corruption and bribery, especially
eliminating unhealthy relationships between financial institutions such as corporations, banks,
audit firms Heavier penalties should be applied to deterrent executives who intend to abuse
power to occupy loans for illegally personal interests.

In addition, enterprises should be

forbidden to allow top management of the companies focused on particular individuals, hence, to
restrict the probability of abusing power for unhealthy gains.

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3. Responsibility of the State Securities Commission of Vietnam (SSC)

The operation of Stock Market in Vietnam is needed to be under tight supervision of SSC. Like
SEC (The Securities and Exchange Commission of the US), SSC play an important role in
overseeing and regulating the securities markets. SSCs primary purpose is to protect investors and
the integrity of the markets, including the management of listing of securities to prevent pushing
the price of stocks for personal gains. Furthermore, it is a responsibility for Stock Exchange
controller to administer the reliability of information provided by companies, assuring that
investors would have right investments.

4. Audit quality
Applying and promoting Vietnamese Accounting Standards (VAS) and Auditing Standards are
vital to govern the preparation of external financial reports and the audit of those reports. The
Accounting Standards should be adjusted and revised to suit Vietnamese conditions, thus to ensure
the relevance, reliability and comparability of the financial statements as well as the financial
position of companies which provide useful information to investors in making investment and
business decisions. Vietnamese Standards on Auditing are used for external audits of financial
statements. Audit firms and auditors legally practicing their profession in Vietnam have the
responsibility to implement these Standards in their operations. Therefore, Auditing Standard is
need to be updated and developed in accordance with the characteristics of Vietnamese audit
system.
Besides, one of the major reasons for failure of audit firms is lack of independence and
transparency of auditing procedures. Therefore, it is essential to monitor the quality of operations
and audit reports of audit firms, as well as enhance the profession and ethics in auditors.

E. CONCLUSION
This paper is to determine and explain WorldComs accounting fraud and to reveal the integrity of
the Companys management, relationship with investment bankers, audit firm and politicians
which resulted in the collapse of this US telecom giant the largest bankruptcy in the US history,
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and thus leading to the massive loss of hundreds of thousands of investors. WorldCom, the secondbiggest long-distance phone company and the largest mover of internet traffic, admitted to inflate
profit by classifying line cost as capital expenditures. Through a series of bribery with SSB
investment bank, Arthur Andersen its external audit firms and other politicians, the company
succeeded in cooking the books as well as making its stocks price overvalued due to illegal
personal gains of a number of WorldCom s executives.
On the other hand, this survey also recommended some solutions and practical lessons for
Vietnam, including the implement of act against creative accounting, corruption and bribery,
enhancing the management of the government in general and Securities Commission of Vietnam
in particularly to the Stock Market Besides this research, we hopefully expect to another further
investigation in the near future with deeper and broader concentration on solution for Vietnamese
corporations.

REFERENCES
1. Vietnamese, a article, 2008, Worldcom - Bom Tai Chinh Moi Sau Enron. Available at
URL:
http://www.khoinghiep.info/dieu-hanh-doanh-nghiep/tai-chinh/3645-worldcom-bomtai-chinh-moi-sau-enron.html
2. Vietnamese, a article, 2009, Nguyen Nhan That Bai Cua Cac Cong Ty Kiem Toan
My. Available at URL:
http://www.tapchiketoan.com/ke-toan-quoc-te/kinh-nghiem-mot-so-nuoc/nguyennhan-that-bai-cua-cac-cong-ty-kiem-to-2.html
3. Vietnamese, 2001, Bao Cao De Tai nguyen Nhan enron va worldcom sup do.
Available at URL:

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http://tailieu.vn/xem-tai-lieu/bao-cao-de-tai-nguyen-nhan-enron-va-worldcomsup-do-.463089.html.
4. English, Daniels Fund Ethics Initiative, University of New Mexico: WorldComs
Bankruptcy Crisis. Available at URL:
http://danielsethics.mgt.unm.edu/pdf/WorldCom%20Case.pdf
5. English, Cenk Tolunay, Yan Wang , Hong Ma, Yuhong Zhang: Worldcom: The Fraud.
Available at URL:
http://www.cenktolunay.com/files/WorldCom-Paper.pdf
6. English, Aigbe Akhigbea, Anna D. Martin, Ann Marie Whyte Contagion effects of the
worlds largest bankruptcy: the case of WorldCom. Available at URL:
http://www.aiecon.org/advanced/suggestedreadings/PDF/sug52.pdf
7. English, Dick Thornburgh, 2002, First Interim Report of Dick Thornburgh,
Bankruptcy Court Examiner. Available at URL:
http://news.findlaw.com/wp/docs/worldcom/thornburgh1strpt.pdf
8. English, Dennis R. Beresford, Nicholas deB. Katzenbach, C.B. Rogers, Report of
Investigation. Available at URL:
http://news.findlaw.com/wsj/docs/worldcom/bdspcomm60903rpt.pdf

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