Memorandum
To: Mr. Steve Alisharan
From: Catherine (Zhe) Jiang
Subject: Accounting Fraud at WorldCom Case
Date: April 9th, 2014
Issues
WorldCom, one of the world’s largest public telecommunications company, filed for
bankruptcy in the summer of 2002 due to the disclosure of accounting fraud. The company
overstated its balance sheet by over $70 billion and eventually caused losses in shareholder
value of approximately $250 billion. The accounting fraud was committed in two major
ways: first, exaggerating reported revenue; second, reducing existed line cost. It was
directed by CEO Bernard Ebbers and CFO Scott Sullivan to keep up the falling down
stock price of WorldCom caused by the heightened market competition. A complete
breakdown of corporate governance system took place within WorldCom. The major
corporate governance failures in this company include ineffective Board of Directors, lack
of internal transparency and internal control, and failure on the part of the outside auditor.
Analysis
Board of Directors has general functions of advisory and monitoring. Its responsibilities
include formulating policy, foresight ability, strategic thinking, management supervisory
and holding accountability towards stakeholders and shareholders. However, the directors
of WorldCom had little or even no involvement in company’s business by merely attending
the board meetings.
The Chairman, Ebbers over-controlled the board meetings by determining board’s agenda
and manipulating its decisions. To govern the company to perform properly and
effectively, the Board of Directors should be a combination of executive directors and
non-executive directors who assist in reducing interest conflict between management and
shareholders by having an independent voice in the board meeting. However, among all
