EXAMINING A BUSINESS FAILURE
Examining a Business Failure
Week One Assignment
University of Phoenix
Group Number: SC09MBA10
G. Edward McCullough, M.A.
March 25, 2010
Examining a Business Failure: WorldCom
Why do businesses fail? Most business corporations experience company failure because of their lack of organizational leadership and unethical practices, which can consist of fraud, conspiracy, falsifying documents, and embezzlement. An example of a business failure is most recognized by the WorldCom (2002) bankruptcy scandal. Many organizational behavior (OB) theories as it relates to leadership, management, and organizational ...view middle of the document...
There were many players that were involved in this scandal. WorldCom CFO Scott Sullivan, Controller David Myers and Director of General Accounting Buford Yates all used questionable accounting methods to hide the financial condition by lying about the company’s financial growth and profitability to increase its stock. (Jonesington, J., 2007)
WorldCom’s fraud was accomplished by two main actions. Jonesington says, “First, WorldCom’s accounting department underreported line cost (interconnected expenses with other telecommunication companies) by capitalizing these cost on the balance sheet rather than properly expensing them. Second, the company inflated revenues with bogus accounting entries from corporate unallocated revenue account.”(Jonesington, J., 2007, para 6). WorldCom was upside down when it came to its debt thanks to the bad investment decisions Ebbers conducted.
By July 2002, WorldCom filed for Chapter 11 (bankruptcy protection), which was the largest recorded filling in U.S. History. This was the first discovery of the illegal activity by WorldCom’s own internal audit department, which uncovered about $3.8 billion of fraud in June 2002. (Jonesington, J., 2007) The company audit committee and board of directors were notified of the fraud and acted promptly. According to Theodore di Stefano (2007), “Sullivan was fired, Myers resigned, and the Securities and Exchange Commission (SEC) launched a full investigation”. (di Stefano, T., 2005, para 10) By the end of 2003, it was estimated that the company’s total assets had been inflated by around $11 billion (WorldCom, 2005).
How could this have been prevented? Was a question that a lot of people were asking themselves? The WorldCom board of directors should have paid more attention and questioned Ebbers financial moves. The main attribute to WorldCom’s failure was the failure in corporate governance. According to Theodore di Stefano of News Network says, “WorldCom made major accounting misstatements and hid increasingly perilous financial condition of the company”. (di Stefano, T., 2005, para 10). Stefano says, “Reports of the investigation dated March 31, 2003 that was prepared for the Federal Bankruptcy Court overseeing WorldCom was found”. Stefano continues by quoting the following from the report, “Enormous as the fraud was, it was accomplished in a relatively mundane way: more than $9 billion in false or unsupported accounting entries were made in WorldCom’s financial system in order to achieve desired financial reported results”. (di Stefano, T., 2005, para 10) Ebbers driving factor was the business strategy. Ebbers were focused on achieving impressive growth through acquisitions, says di...