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Prior to its demise in 2002 as a result of significant accounting fraud, WorldCom was one of the largest telecommunications firms in the world.
The fraud committed by WorldCom mainly used two strategies: overstating revenues and understating expenses. Long-term contract revenues were recorded by the corporation as immediate income even if they had not yet been paid. Additionally, it created fictitious assets and decreased its reported costs by transferring expenses from its income statement to its balance sheet. WorldCom was able to increase its earnings and satisfy Wall Street expectations thanks to these practices.
But the WorldCom fraud could not continue indefinitely. The business eventually ran out of money and was unable to settle its debts. WorldCom acknowledged that over the course of the previous five quarters, it had inflated its profits by $3.8 billion in June 2002. The corporation and its executives were the targets of a flurry of inquiries, lawsuits, and criminal accusations following this disclosure. In July 2002, WorldCom declared bankruptcy, wiping out billions of dollars in shareholder value as well as thousands of jobs.
The accounting field and the telecoms business were both significantly impacted by WorldCom's scam. It aided in the telecom industry's downfall, which was already being hampered by oversupply and weak demand. As a result of its involvement in the Enron disaster, Arthur Andersen, WorldCom's auditor, already had a tarnished reputation and diminished credibility. The Sarbanes-Oxley Act of 2002, which tightened laws and monitoring for corporate governance and financial reporting, was passed by Congress in response to WorldCom's deception.
The deception committed by WorldCom is a perfect illustration of how unethical behavior can ruin a business and hurt its stakeholders. Additionally, it demonstrates the significance of managers, auditors, regulators, and investors exercising diligence and vigilance in identifying and preventing fraud. The deception at WorldCom tells us that establishing trust and value in business requires honesty, integrity, and transparency.
