Between 1999 and 2002, WorldCom underwent one of the largest public company accounting frauds at the hands of Chief Executive Officer, Bernard J. Ebbers in United States history. (Cohen,2013) Ebbers owned hundreds of millions of dollars in WorldCom stock. When the stock price dropped, banks began demanding that Ebbers cover more than $400 million in margin calls. Ebbers convinced the board to lend him the money so that he would not have to sell substantial blocks of stock. He also began an aggressive campaign to prop up the stock price by creating outright fraudulent accounting entries. Ultimately more than $9 billion in false accounting entries were made in WorldCom’s ...view middle of the document...
WorldCom was found guilty on all charges which resulted in WorldCom filing for bankruptcy in 2002 and Ebbers being convicted of conspiracy and fraud. This led to Ebbers serving a 25-year sentence in federal prison that started in 2006.
WorldCom was found to have violated several federal antifraud laws which included but were not limited to the Securities Exchange Act of 1934 which governs the secondary trading of securities in the United States. (Brown &Sukys, 2013) Under the Securities Exchange Act of 1934 companies can not transfer cost to capital accounts in order to make themselves appear profitable on year end statements. Additionally, it establishes that senior officials are responsible for verification of financial statements. (SEC,2002) In the case of WorldCom, the primary claim that was made was that senior officials did not know that false accounting practices were happening, and that the officials also did not know that money was being taken out in loans against the company in order to falsify statements. The SEC found that WorldCom was negligent in this case and that they were guilty due to the fact that a subsection of this law requires companies to submit factual and accurate quarterly reports.
WorldCom’s fraudulent behavior led to the establishment of many new laws, reform committees and regulations in the corporate sector of society. The most important of these was the Sarbanes & Oxley Act. Under SarbOx “chief executive officers, chief operating officers, and chief financial officers are required to present declarations that confirm the accuracy of their corporation’s financial statements. They must indicate that the statements do not misrepresent the company’s economic situation. The penalties for violating this particular provision include possible incarceration and monetary penalties” (Brown &Sukys, 2013). This act was most likely passed due to political pressure from the general public to put laws in place that protected investors and prevented future breaches, but was a much needed adjustment to government involvement in corporate business. Prior to SarbOx there was very little corporate responsibility for financial statements that were produced and who blame fell on when these statements were fraudulent was not clearly identified. As additional components to SarbOx call for restatement of incentives and bonuses if fraudulent activity is discovered, along with the outlawing of top executives to accept loans from the company they are employed by. In WorldCom’s case this would have prevented Ebbers from taking out $400 million dollars in loans from WorldCom which led to his ability and need to commit fraudulent reports. If loans to top executives had been barred this could have created a much different picture for WorldCom.
As an additional component of SarbOx there was an establishment and an ethics hotline and a requirement for the SEC to have access to financial reporting and the...