Case Analysis

World.com
CEO Bernard Ebbers CFO Scott Sultuvan
World com was small firm in Mississippi which was incorporated in 1983 to resell long distance telecom services Due to break up of the telecom giant AT& T in 1983 there were opportunities emerging in telecom market 4 investors including Bernerd decided to take advantage of this new market opportunity They brought LDDS ( long distance discount services ) with an objective of reselling AT&T long distance services to small and mid size business Over a period of time LDDS was renamed as world Com as acquisitions and became 2nd largest telecom firm in US they grew through

Due to sudden crash in stock market in 2000 , telecom industry in usa faced major problems like 1. Massive capital investment 2. Excess capacity 3. Continuous fall in LDDS prices 4. Much lower demand for LDDS services World com was severely affected by above problems World resorted to wrong accounting ( booking expenses as capital expenditure ) to show that they were making progress In 2002 due to losses Ebbers was eased out by Board of Directors and New CEO jhon Sidgmore was appointed

 In 2002 co. When co. identified its losses , it recalled debts from creditors and negotiated compromised deal with its lenders which failed and company had to face legal action bankruptcy The main reason for this downfall of world com could be : Ignored market conditions or miscalculation of demand it created excess capacity was created Adverse Industry conditions Poor Execution of merger integration Two Billing programmes were being run simultaneously creating huge pendency of receivables Bad accounting practices Relaxed Regulatory Environment WorldCom auditors never challenged the illegal accounting taking place since 1999 Poor Top Management

Case Questions:

Q1.)What are the advantages and disadvantages of an Aggressive merger Policy like that at WorldCom
Advantages of an Aggressive Merger Policy
WorldCom achieved its position as a significant player in the telecommunications industry through the successful completion of 65 acquisitions. Two of these acquisitions were particularly significant. The MFS Communications acquisition enabled WorldCom to obtain UNet, a major supplier of Internet services to business, and MCI Communications gave WorldCom one of the largest providers of business and consumer telephone service

 By 1997, WorldCom's stock had risen from pennies per share to over $60 a share. Through what appeared to be a prescient and successful business strategy at the height of the Internet boom. As the stock value went up, it was easier for WorldCom to use stock as the vehicle to continue to purchase additional companies. The acquisition of MFS Communications and MCI Communications were, perhaps, the most significant in the long list of WorldCom acquisitions.

Disadvantages
Senior management made little effort to develop a cooperative mindset among the various units of WorldCom. Inter-unit struggles were allowed to undermine the development of a unified service delivery network. WorldCom closed three important MCI technical service centers that contributed to network maintenance only to open twelve different centers that, in the words of one engineer, were duplicate and inefficient. Competitive local exchange carriers (Clercs) were another managerial nightmare. WorldCom purchased a large number of these to provide local service

Q2. What Motivation could explain the fraudulent accounting at WorldCom

To increase its market share WorldCom was much interested in acquisition To project better performance of company in eyes of shareholders. To be ahead of its competition

Enron Case
CEO- Kenneth Lay CFO- Andrew Faustow
Auditing Firm- Arthur Anderson Enron Corporation is an energy trading, natural gas, and electric utilities company based in Houston, Texas that employed around 21,000 people by mid-2001, before it went bankrupt. Fraudulent accounting techniques allowed it to be listed as the seventh largest company in the United States, and it was expected to dominate the trading it had virtually invented in communications, power, and weather securities. Enron cynically and knowingly created the phony California electricity crisis of 2000 and 2001. There was never a shortage of power in California. Using tape recordings of Enron traders on the phone with California power plants, the film chillingly overhears them asking plant managers to "get a little creative" in shutting down plants for "repairs." Its European operations filed for bankruptcy on November 30, 2001, and it sought Chapter 11 protection in the U.S. on December 2.Enrson's global reputation was undermined, by persistent rumors of bribery and political pressure to secure contracts in Central and South America, in Africa, and in the Philippines. Especially controversial was its $30 billion contract with the Maharashtra State Electricity Board in India, where it is alleged that Enron officials used political connections within the Clinton and Bush administrations to exert pressure on the board. On January 9, 2002, the United States Department of Justice announced it was going to pursue a criminal investigation of the Enron scandal and Congressional hearings began on January 24. After a series of scandals involving irregular accounting procedures bordering on fraud involving Enron and its accounting firm Arthur Andersen, it stood at the verge of undergoing the largest bankruptcy in history by mid-November 2001. A white knight rescue attempt by a similar, smaller energy company, Dynegy, was not viable. During 2001, Enron shares fell from US$85 to US$0.30. As Enron was considered a blue chip stock, this was an unprecedented and disastrous event in the financial world. Enron's plunge occurred after it was revealed that many of its profits and revenue were the result of deals with special purpose entities. The result of this accounting scandal was that many of the losses that Enron encountered were not reported in its financial statements. Following the 2001 bankruptcy filing, Enron has been attempting to restructure in order to compensate as many creditors as possible. Enron's

innovative core energy trading business was sold early in the bankruptcy proceedings to Merrill Lynch and Company. A last-ditch survival attempt was made in 2002 through a planned merger with arch-rival Dynegy Corporation. Dynegy backed out during merger talks, acquiring control of Enron's original, predecessor company- Northern Natural Gas- in the process.

Q1) what lessons have you learnt from enron saga?

(1) There should be a healthy corporate culture in a company. In Enrons case, its corporate culture played an important role of its collapse. The senior executives believed Enron had to be the best at everything it did and the shareholders of the board, who were not involved in this scandal, were over optimistic about Enrons operating conditions. When there existed failures and losses in their company performance, what they did was covering up their losses in order to protect their reputations instead of trying to do something to make it correct. The to-good-to-betrue should be paid more attention by directors of board in a company. (2) A more complete system is needed for owners of a company to supervise the executives and operators and then get the idea of the companys operating situation. There is no doubt that more governance from the board may keep Enron from falling to bankruptcy. The boards of directors should pay closer attention on the behavior of management and the way of making money. In addition, Enrons fall also had strikingly bad influence on the whole U.S. economy. Maybe the government also should make better regulations or rules in the economy. (3) Mark to market is a plan that Jeffrey Skilling and Andrew Fastow proposed to pump the stock price, cover the loss and attract more investment. But it is impossible to gain in a long-term operation in this way, and so it is clearly immoral and illegal. However, it was reported that the then US Security and Exchange Commission allowed them to use mark to market accounting method. The ignorance of the drawbacks of this accounting method by SEC also caused the final scandal. Thus, an accounting system which can disclose more financial information should be created as soon as possible. (4) Maybe business ethics is the most thesis point people doing business should focus on. As a loyal agent of the employer, the manager has a duty to serve the employer in whatever ways will advance the employer's self-interest. In this case, they violated the principle to be loyal to the agency of their ENRON. Especially for accountants, keeping a financial statement disclosed with true profits and losses information is the basic responsibility that they should follow.

Q2) what do you think are the reasons for the sudden collapse of enron?
The lack of truthfulness by management about the health of the company, according to Kirk Hanson, the executive director of the Markkula Center for Applied Ethics. The senior executives believed Enron had to be the best at everything it did and that they had to protect their reputations and their compensation as the most successful executives in the U.S. It has been suggested that conflicts of interest and a lack of independent oversight of management by Enron's board contributed to the firm's collapse. Moreover, some have suggested that Enron's compensation policies engendered a myopic focus on earnings growth and stock price. In addition, recent regulatory changes have focused on enhancing the accounting for SPEs and strengthening internal accounting and control systems. The revelation of accounting irregularities at Enron in the third quarter of 2001 caused regulators and the media to focus extensive attention on Andersen. The magnitude of the alleged accounting errors, combined with Andersen's role as Enron's auditor and the widespread media attention, provide a seemingly powerful setting to explore the impact of auditor reputation on client market prices around an audit failure. CP investigates the share price reaction of Andersen's clients to various information events that could lead investors to revise their beliefs regarding Andersen's reputation

Q3) Was Enron having proper corporate governance in place? If not precisely was lacking
No they did not have proper corporate governance in place. They got involved in unethical ways of doing business which lead to their downfall There were accounting irregularities occurring They did not have a clear and transparent system in place The top management was not truthful to the company itself

Also as suggested by SEC They should have imposed control wherever necessary to check the internal department They should have had different committees like o Nomination committee o Audit committee o Remuneration committee

Rohit kumar 19030