This case presents, with additional information, the WorldCom saga included in this chapter. Questions specific to World-

Com activities are located at the end of the case.

WorldCom, Inc., the second-largest U.S.

telecommunications giant and almost 70%

larger than Enron in assets, announced on June 25, 2002, that it had overstated its cash flow by \($3.8\) billion.1 This came as a staggering blow to the credibility of capital markets. It occurred in the middle of the furor caused by: the following:

• The Enron bankruptcy on December 2, 2001, and the related Congress and Senate hearings and Fifth Amendment testimony by Enron executives

• The depression of the stock markets

• The pleas by business leaders and President Bush for restoration of credibility and trust to corporate governance, reporting, and the financial markets

• Responsive introduction of governance guidelines by stock exchanges and the SEC

• Debate by the U.S. Congress and Senate of separate bills to improve governance and accountability

• The conviction of Arthur Andersen, auditor of both Enron and WorldCom, for obstruction of justice on June 15, 2002........

Questions:-
1. Describe the mechanisms that World-
Com’s management used to transfer profit from other time periods to inflate the current period.

2. Why did Arthur Andersen go along with each of these mechanisms?
3. How should WorldCom’s board of directors have prevented the manipulations that management used?
4. Bernie Ebbers was not an accountant, so he needed the cooperation of accountants to make his manipulations work. Why did WorldCom’s accountants go along?
5. Why would a board of directors approve giving its Chair and CEO loans of over \($408\) million?
6. How can a board ensure that whistleblowers will come forward to tell them about questionable activities?