The History Of Worldcom Accounting Essay


Periodically, the latest major fraud hits the headlines as other organisations sit back and watch, telling themselves that it couldnt happen here. But the reality is that fraud can happen anywhere. Despite the serious risk that fraud presents to business, many organisations still do not have formal systems and procedures in place to prevent, detect and respond to fraud (CIMA, 2008). Accountant Today (2007, p.6) states that "mini-Enron's" were happening all over the world all the time and to confirm with that, the media has been highlighting cases of corporate reporting gave faulty. Before that, this statement has been publishing in an article called Malaysian Business (2002) by MIA President Datuk Abdul Samad.

As we all know, the Enron scandal can be said to be the 'accounting scandal of 2001'. After a series of revelation, involving irregular accounting procedures bordering on fraud perpetuated throughout the 1990s involving Enron and its accounting firm Arthur Andersen. Enron stood on the verge of undergoing the largest bankruptcy in history by mid-November 2001. As the scandal was revealed, Enron shares dropped from US$ 90 to just pennies. Enron had been considered a blue chip stock, so this was an unprecedented and disastrous event in the financial world.

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The occurrence of mini-Enron's cases could be due failure adhere to the best practices of good corporate governance. Decision making formation can be obtained from companies financial statements and the quality of the information will be enhanced by the added credibility from having audited (pound, Willinghorn and Car Micheall, 1997). A company is compelled under Company Act 1976 to appoint an external auditor annually to audit its annual accounts. Ismail (2007) states that the mandatory appointment of external auditors by each company is the recognition by the lawmakers that external auditor plays a vital governance role to serve the interest of shareholders. Companies could be assured of the quality and independence of auditors as there would be committed board overseeing the function of auditors itself. Accounting firms would now require higher standards of competencies and staff skills that would stick strictly to the rules (Yap, 2007).

Traditional accounting fraud is the intentional misinterpretation of financial statements in order to obtain wrongfully an advantage, retain a benefit, or avoid a detriment. But in general purpose, it depends on co-opting and deceiving the external auditors into issuing an expert opinion that the financial statements are materially accurate without disclosure. Shapiro (2011) observed that a significant proportion of the literature is implicitly or explicitly intended to inform capital market participants using data contained within public fillings, especially financial data and non-financial data such as characteristics of corporate governance were investigated.

In the world today, fraud can happen anywhere and at any time. Recently, one of the biggest companies in Malaysia, Transmile Group Berhad had fall into the accounting scandal. Transmile is an investment holding company involved in the provision of air freight, air craft engineering and maintenance services, pride it as being a company with Stellar Performances, operationally and financially as well as its share price. The company was founded by Gan Boon Aun in November 1993 and was later listed on Bursa Malaysia Securities Berhad on 27th June 1997. Transmile shareholding as at 28th April 2006 showed a mixture of local and foreign shareholders with largest shareholder being Trinity Coral Sdn. Bhd. (19.5%), a company that was part of the diversified international conglomerate, the Kuok Group. Kuok Gr oup had earlier in March 2004 bought 28.5% stake in Transmile, via Trinity Coral Sdn. Bhd., from Gan and Khiudin Mohd for RM 282.2 million (Bursa Malaysia, 2010). On 28th April 2004, Transmile appointed Tun Dr. Ling Liong Sik as its independent and non-executive chairman and the outgoing chairman cum executive director, Gan had been re-designated as director and chief executive officer (CEO) of the company. Other notable shareholders were Pos Malaysia Berhad (17.3%), TP Morgan Chase Bank (USA) (4.4%), Employee Provident Fund (EPF) (3.9%), GAP Ltd. (3.9%), Goldman Sachs International (3.4%) and Gan Boon Aun himself (2.5%) (Bursa Malaysia, 2011).

Transmile had always been one of the favourite companies for investors and analysts alike. Its share price had risen by 428.3% since 2003 and analysts had always maintained bullish views on Transmile. On 15th February 2007, the company released its unaudited 4th quarter of 2006 report. Both local and foreign analysts agreed with it by giving positive assessments on the company's prospects and loftily target prices. Transmile's annual report since 1998 until 2006 showed that the company has been increasing their revenues and profits with advantages in dealing with a wide range of network of operations. Zahrain (2012) says however in 2007, Transmile's company was hit with an accounting scandal with allegations that its revenue and profits had been materially overstated as far back as year 2004. Securities Comission (SC) charged Gan (CEO) and former executives, Khiudin Mohd and Lo Chok Ping in providing misleading unaudited consolidated reports for the 4th quarter of financial year ended 31st December 2006. "An offence under section 86 (b) of the Security Industry Act (SIA) were also charged under section 122B of the SIA". After a thoroughly investigation, SC drop the charge against Lo Chok Ping, the former chief financial officer (CFO) of Transmile after he paid a compound of RM700,000. The SC also offered compounds of RM500,000 each to the two non-executive directors of Transmile, Chin Keen Feung and Shukri Sheikh Abdul Tawab, for an offence under section 122B(b)(bb) SIA 1983 for knowingly permitting the making of misleading statements to Bursa Malaysia. Bursa Malaysia also reprimanded Transmile for "breaching the Listing Requirements pertaining to timely and accurate disclosures of financial information". Both Gan and Khiudin were fined RM781,500 each and Chin and Shukri, RM162,600 each.

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Located in Clinton, Mississippi, WorldCom is the largest telecommunication company with twenty millions of customers, thousands of corporate clients and 80,000 employees. WorldCom is just another case of failed corporate governance, accounting abuse and outright greed. Bernie Ebbers, a Canadian by birth, the 6 foot, 3 inch former basketball coach and Sunday school teacher emerged from the collapse of WorldCom not only broke but with a personal net worth as a negative nine-digit number (Pulliam and Sandberg, 2002). WorldCom achieved its position as a significant player in the telecommunications industry through the successful completions of 65 acquisitions (Kurt, 2002). Between 1991 and 1997, WorldCom spent almost $60 billion in the acquisitions of many of these companies and accumulated $41 billion in debt (Romeo, Simon and Atlas, 2002). The MFS Communications acquisitions enabled WorldCom to obtain UUNet, a major supplier of internet services to business and consumer telephone service. By early May of 2002, Ebber resigned his past as CEO and two month later, WorldCom declared itself the largest bankruptcy in American history (Romeo, Simon and Atlas, 2002). The company announced that it had overstated its earnings in 2001 and the first quarter of 2002 by more than $3.8 billion. Harper (2011) says that disguised the company actual net losses for the five quarters because the capital expenditures can be deducted over a longer period of time, whereas the expenses must subtract from revenue immediately. Again, Harper (2011) says the company has ignored or undervalued accounts receivable owed to acquired companies.