WorldCom: Cooking the Numbers & Its Negative Effects - Research Paper

Introduction

Based on its definition, cooking the numbers refers to a fraudulent business practice in which businesses engage in to falsify the financial information of the company (Kenton, 2019). The falsification is aimed at enabling the managers to achieve their personal company goals. However, these actions, in turn, result in a negative impact on the company. The negative effect is based on the reduction of sales levels resulting in the making of losses. The paper examines WorldCom Company and the actions of the managers that led to its bankruptcy.

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WorldCom Company

WorldCom Company is an organization that majored in telecommunications. According to Tran (2002), WorldCom Company bankruptcy took place after unethical financial activities within the organization. Based on the analysis, which was conducted by the chief executive officer, in investigating the bankruptcy, it was evidenced that the roots for the bankruptcy were based on the actions of the former chief financial officer and controller (Tran, 2002). The two individuals were fired because they claimed $3.8bn in the regular expenses as capital investments in the year 2001. The claim was intended to cover for their mischievousness in handling the funds of the company.

Under normal circumstances, the operating expenses must be directly subtracted from revenues, whereas the cost of capital expenses can be spread over time (Tran, 2002). Failure to adhere to these conducts results in the inflation of profits, which was the case in WorldCom Company. The two individuals were arrested while in New York, and they were handcuffed and paraded in front of TV cameras. These acts in arresting them were as per Bush's administration crackdown that was conducted on individuals who indulged in corporate crimes (Tran, 2002). The individuals were charged with fraud, a conspiracy among other charges, and are currently facing 65 years in prison.

The then accountant of the organization at the time in which the misconduct occurred was Arthur Andersen. Andersen was also responsible for financial record keeping at Enron limited, a company that also faced financial scandal. However, Andersen argues that the problem was not spotted at an early stage because of the withholding of information by the chief executive of the organization (Tran, 2002).

The investigation reports from the organization reveal that there was a further $3.3 billion in accounting errors. Thus, this figure has doubled the size of the scandal in the company to more than seven billion dollars. Based on the reports, these figures were improperly recorded in the books from the year 1999 up to March 2002 ("Report of Investigation," 2003). Since the emergence of the accounting scandal, the company has still not gotten back to its original state and is as good as being non-existent. The company has indulged in sourcing individuals to aid them in analyzing their records to identify the root cause of fraud.

Conclusion

Currently, the company has new accountants who have been tasked with scouring the books up to 1999. The bringing in of new accountants is aimed at engaging in a comprehensive audit to get an accurate picture of how the fraud in the company took effect. However, this process is expected to last for several months, which will hinder the production limits of the organization. The company has also been subjected under investigation by the department of justice and the Securities and Exchange Commission, which is the financial regulator of the United States. The company is also charged with fraud for hiding a loss of $1.2 bn, thus subjecting it under bankruptcy protection. The analysis portrays WorldCom as a company that is affected because of the rise in the cooking of figures. Therefore, this has increased the levels of bankruptcy.

References

Kenton, W. (2019). Cook the Books. Investopedia. https://www.investopedia.com/terms/c/cookthebooks.asp

Report of Investigation. Sec.gov. (2003). Retrieved 12 February 2020, from https://www.sec.gov/Archives/edgar/data/723527/000093176303001862/dex991.htm.

Tran, M. (2002). WorldCom accounting scandal. The Guardian. https://www.theguardian.com/business/2002/aug/09/corporatefraud.worldcom2