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Submitted by rachie123 on October 21, 2006
Category: Business
Words: 1446 | Pages: 6
Views: 282
Popularity Rank: 39,475
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There were several situations that lead the executives and managers of WorldCom to "cook the books." Acquisition of other companies drove WorldCom to spend beyond their means; managers were told to spend whatever was necessary to increase revenue, even if it meant that long-term costs would outweigh the short-term gains. This fiscally unhealthy mentality led to a very bad decision to enter into long-term fixed rate leases for network capacity with extensive punitive termination provisions. Once the market for WorldCom's services started to cool down, the expense to revenue ratio started to increase – as expenditures increased and revenue decreased, the percentage value would rise above the targeted 42% to a larger, more unfavorable percentage. Since the expense to revenue ratio was used as a performance indicator by analysts and industry observers, pressure was put on the senior managers and lead executives to find a way to become more profitable again.
Each major player in player in WorldCom had their own pressures too. CEO Bernie Ebbers had taken loans against his WorldCom stock to support several personal business ventures. The success of WorldCom, as measured by its stock price, was vital to supporting his outside business. Thus, keeping the value of the company inflated would be to his benefit. CFO Scott Sullivan, a bright and ambitious man credited as engineering the successful MCI merger, wanted to find quick fixes to the expense to revenue ratio problems. Unfortunately, each action taken – whether it was the accrual releases or the expense capitalizations – caused a domino effect and caused the need for more cover-ups of each subsequent action taken.
Pressure from Sullivan directly influenced the actions of controller David Myers and director of general accounting Buford Yates. Most of the instructions to incorrectly adjust the financial information came directly from Sullivan, Myers and Yates. Lower level employees such as Betty Vinson...
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