What Happened to Worldcom?

WorldCom was a major telecommunications company that was worth billions of dollars. Unfortunately, the large sums of money that this company was earning were not being monitored in the correct manner and WorldCom collapsed because of major accounting fraud.

With the many companies that have gone belly up because of accounting fraud, it is very important to understand what caused WorldCom to fail.

• Worldcom can be used as an example to demonstrate why it is essential for companies to be as honest as possible in regards to the ways in which a company’s assets are handled.
• In many ways, the demise of WorldCom came long before the problems that occurred with many of the banks within the United States. This being the case, WorldCom can act as a model to show the tremendous losses that can occur when companies are not forthright about their accounting practices.

Accounting Fraud at WorldCom

In many ways the failures at WorldCom are just a case of the rooster coming home to nest.

• WorldCom's CEO Bernie Ebbers orchestrated a large accounting scheme that involved around $11 billion.
• Ebbers was very caught up in appearances and wanted both himself and his company to look good.
• Ebbers begin the process of acquiring a number of telecommunications companies including MCI.
• Ebbers wanted to show profit right away instead of allowing for the time that was needed to learn how to properly manage the acquisitions in order to make them a success.
• To prove to Wall Street that WorldCom was indeed growing because of his acquisitions, Ebber decided to adjust the accounting, which in turn made the stock prices more attractive.
• It was also determined that Ebbers was having his own financial issues that he wanted to keep out of the light in order to avoid a possible probe into the finances at WorldCom.
• In order to keep his personal financial image looking good, he continued the process of accounting fraud both on a professional and a personal level.

Understanding Accounting Fraud

In order to understand what caused WorldCom to fall you have to first understand a little about accounting fraud.

• There are times when companies decide to change the numbers of their profits on their books in order to make it appear as if they are earning more than they really are. This is done for a variety of reasons.
• One main reason is that this action affects stock price. More people are willing to invest in a company if it is very obvious from a profit standpoint that the company is doing well.
• Another reason why many companies resort to accounting fraud is to create the appearance of financial well-being. There are companies, particularly the larger ones, that do not want to be perceived as failures.
• Although many companies go through their slow periods, there are some companies which choose to hide the fact that there are obvious problems with their finances by simply doctoring the information on their books.
• This can become quite a major problem, particularly if the company is not able to account for these additions of funds with future earnings.

Learning Lessons from the WorldCom Demise

There is much to be learned from the demise of WorldCom. It is unfortunate that even years later many banks and other financial institutions followed in the same steps as WorldCom, only to encounter significant losses and debt.

• The WorldCom debacle shows that financial accountability is needed.
• Entities such as the Board of Directors should be instrumental in ensuring that health of the company is maintained in an honest manner.
• What happened to Worldcom really addressed the need for regulation that can prevent incidents such as these from occurring.
• Major companies such as WorldCom have so much to lose when they fail.

There are numerous ways in which a company's failure can greatly impact everything from the economy to the loss of numerous jobs. Thus, it is very important that companies learn from the mistakes of WorldCom in order to prevent such calamities from occurring in the future.