Worldcom was a high performing stock and a darling of Wall Street investors. The company's management...

Worldcom was a high performing stock and a darling of Wall Street investors. The company's management had repeatedly fulfilled its objective to maximize profits and the stock's price, yet somehow the company failed.

What are the major causes of the Worldcom collapse?
What does the Worldcom collapse tell you about audited financial statements?
If Worldcom's CEO and CFO were simply doing their job to maximize profits, why then did they go to prison?
What comment can you make about Worldcom's corporate governance (i.e., Board of Directors)?
Who was the heroine of the Worldcom scandal?

Solutions

Expert Solution

1.)Causes of Worldcom failure:

Worldcom in 1990's followed an aggressive growth strategy via acquisition of other companies funded by selling its overvalued stocks.Also there occurred to be internal misalignment due to different corporate culture which eventually resulted in inefficient and ineffective leadership.

2.) The audited statements indicated that Worldcom was hiding its losses by inflating its revenue and cash flow by recording its expenses as investments.In fact Worldcom recorded a profit of $1.4 billion in 2002 Quarter 1 whereas it was at a loss.

3.)In 1999-2000,After several mergers and acquisitions Worldcom required some time to absorb these acquisitions.Although Ebbers (CEO) felt to the need to show ever increasing revenue which would increase the value of their stock and hence securing financial status and deceiving investors.Hence CEO and CFO of Worldcom resorted to accounting gimmickry and manipulated the expenses of the company as its investments.Hence they were sentenced to prison.

4.) Worldcom's corporate governance turned out to be ineffective and inefficient after a series of events.After several mergers and acquisitions Worlcom required some time to absorb other corporations and align with their corporate culture.Whereas CEO Ebbers (who also owned shares in Worldcom) felt the need to show always increasing revenue so that value of the stocks kept increasing and hence he could secure his financial status.Also due to several mergers,there was misalignment of corporate culture which resulted in inefficient leadership.

keosha answered 1 year ago

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