Juan Dela Torre

BSBA-MA 402

Case of Accounting Fraud at WorldCom

WorldCom, US second largest telecommunication company shocked the world by filing

bankruptcy at 21 July2002. The WorldCom filing surpassed Enron and became the
largest bankruptcy filing in United States history. Due to its rapid growth, WorldCom is
also heavily in debt as they finance the company growth with debt. The collapse of
WorldCom did not just affect their employees, retailers, the government but also
bankers.

WorldCom was a multi-billion dollar telecommunications company that was founded in

1983.The company starts their business under the name 'Long Distance Discount
Services' (LDDS), providing long distance telecommunication services. The venture was
profitable right from the start. In 1985, Bernie Ebbers became the company's CEO. The
company changes its name to WorldCom in 1995.

During the 1990’s, the company starts to grow through series of successful acquisition
and merger. However, during the late 1999, the company’s performance begins to slip
due to heightened competition, overcapacity and reduced demand for
telecommunication services at the onset of the economic recession and the aftermath of
the dot-com bubble collapse. Other than that, falling telecommunications companies
and new entrants were drastically reducing their prices leads WorldCom. All these
pressures caused WorldCom to involve in accounting fraud.

Scott Sullivan, WorldCom's CFO, begins the process of misallocating as capital

expenditure what should have been normal expenses, thus turning losses into profit,
creating a smokescreen that the company is performing well. Things start to come
under light at June 2002 and the company’s stock price plunged. Investigations were
carried out. On June 25, WorldCom admits that it had inflated its earnings by $3.8 billion
--the largest accounting fraud in history. After series of investigation, the total amount
discovered from improper accounting procedures raised to $9 billion causing WorldCom
to file bankruptcy in July. Several top management personnel were held responsibilities
for the fraud.

Source:
http://www.academia.edu/6737272/CASE_3_Accounting_Fraud_at_WolrdCom_BKAL_
3063_Integrated_Case_Study_0_Table_of_Contents
Case of Non Compliance at Hansae Nicaragua and Metro Garments

The monthly salary in August 2002 was 875 córdobas (about US$64). That same year,
a salary increase of 65 córdobas was decreed. However, these companies did not
increase the salaries of their workers, who are paid based on the number of items that
they produce.

• In 2002, the wage for one hours’ work was 2.5 córdobas (17 cents). However, workers
say that when they worked overtime hours, which should have been paid double,
according to Article 62 of the Labor Code, “this was not paid completely or reflected on
all workers’ pay stubs.”

• These companies offer a “production incentive” to those workers that fulfill a

production goal. This incentive ranges from 30-50 córdobas (US$2 – $3.40) per week.
The problem is that the production goal is unreasonably high in the opinion of the
interviewed workers, because 80 operators work on each production line and together
they must produce 6,000 items daily. Furthermore, in order to receive the incentive, they
cannot have absences, late arrivals, or ask for time off. Therefore, workers generally
arrive before 7 am, so as not to lose the punctuality incentive.

• In this way, the company gets each worker to work almost an hour for free, and
excessively increase the physical and mental energy they put into their work, in order to
not lose the incentive. If the workers do not reach the production goal that has been set,
they will not receive the incentive, and the company has benefited from higher
production without having to pay more.

Source:
http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1479&context=globaldo
cs