1)What are the key factors for the collapse of two companies in the view of Corporate Governance?
The following key factors resulted the two companies to a collapse.i)Senior Executives were encouraged to lie, cheat and manipulate records by providing them high margin of profits.ii)Executives were interested in their personal reward structure ignoring thestakeholders’ benefits.iii)Board members were mostly highly rewarded and consist of the friends,who did not raise questions on any doubtful and ambiguous records.iv)Non-Executive Directors were also highly rewarded and they workedindependently.v)Audit Team was bribed, so that the team will produce a clean audit report.vi)Illegal profits were generated and it was shown that all the policies andrules implemented from the top were for the benefit of the company andshareholders, and hence, were ethical.vii)The cost of heavy machinery purchased in a particular period was notspread by the company in the next coming financial years.
2)Who was mainly responsible for the downfall of Enron and WorldCom?
Almost every person involved in any type of unhealthy activity was responsible for the downfall of both companies. However, they can be arranged in a sequence frommost responsible to less responsible as in the following:i)
Board of Directors firstly
: As they were involved in fraudulent and cheat.ii)
Non-Executive Directors secondly
: As they were involved with Board of Directors in unhealthy activities.iii)
Internal Audit Team thirdly
: As they were bribed by Board andManagement to show their audit report clean.
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WorldCom took the telecom industry by storm when it began a frenzy of acquisitions in the 1990s. The low margins that the industry was accustomed to weren't enough for Bernie Ebbers, CEO of WorldCom. From 1995 until 2000, WorldCom purchased over sixty other telecom firms. In 1997 it bought MCI for $37 billion. WorldCom moved into Internet and data communications, handling 50 percent of all United States Internet traffic and 50 percent of all e-mails worldwide. By 2001, WorldCom owned one-third of all data cables in the United States. In addition, they were the second-largest long distance carrier in 1998 and 2002.
How the Fraud Happened
So what happened? In 1999, revenue growth slowed and the stock price began falling. WorldCom's expenses as a percentage of its total revenue increased because the growth rate of its earnings dropped. This also meant WorldCom's earnings might not meet Wall Street analysts' expectations. In an effort to increase revenue, WorldCom reduced the amount of money it held in reserve (to cover liabilities for the companies it had acquired) by $2.8 billion and moved this money into the revenue line of its financial statements.
That wasn't enough to boost the earnings that Ebbers wanted. In 2000, WorldCom began classifying operating expenses as long-term capital investments. Hiding these expenses in this way gave them another $3.85 billion. These newly classified assets were expenses that WorldCom paid to lease phone network lines from other companies to access their networks. They also added a journal entry for $500 million in computer expenses, but supporting documents for the expenses were never found.
These changes turned WorldCom's losses into profits to the tune of $1.38 billion in 2001. It also made WorldCom's assets appear more valuable.
How it Was Discovered
After tips were sent to the internal audit team and accounting irregularities were spotted in MCI's books, the SEC requested that WorldCom provide more information. The SEC was suspicious because while WorldCom was making so much profit, AT&T (another telecom giant) was losing money. An internal audit turned up the billions WorldCom had announced as capital expenditures as well as the $500 million in undocumented computer expenses. There was also another $2 billion in questionable entries. WorldCom's audit committee was asked for documents supporting capital expenditures, but it could not produce them. The controller admitted to the internal auditors that they weren't following accounting standards. WorldCom then admitted to inflating its profits by $3.8 billion over the previous five quarters. A little over a month after the internal audit began, WorldCom filed for bankruptcy.
Where Are They Now?
When it emerged from bankruptcy in 2004, WorldCom was renamed MCI. Former CEO Bernie Ebbers and former CFO Scott Sullivan were charged with fraud and violating securities laws. Ebbers was found guilty on all counts in March 2005 and sentenced to 25 years in prison, but is free on appeal. Sullivan pleaded guilty and took the stand against Ebbers in exchange for a more lenient sentence of five years.