WorldCom's Collapse: Management Failures and Accounting Fraud

Introduction: WorldCom's Rise and Fall

The former corporate behemoth WorldCom has become such an infamous symbol of accounting fraud that it is easy to forget the company was once one of Wall Street's hottest commodities during the dot-com bubble. But its investors were not simply victims of the "irrational exuberance" of the late 1990s and early 2000s boom and bust. WorldCom's presentation of its financial status to investors was a blatant fraud. Lackadaisical management of an increasingly unruly conglomerate, deregulation that permitted conflicts of interest between investment banking firms and the organization, and "creative" accounting that inflated the corporation's net worth were all factors in the losses suffered by innocent investors and employees.

Management Planning: Strategy

WorldCom was not only the center of an accounting scandal — it was also a case of "failed corporate governance" (Moberg & Romar, 2008). Its CEO, Bernie Ebbers, was famous for challenging the supremacy of AT&T and leading WorldCom through what was later called a dangerously aggressive acquisition strategy. This strategy briefly brought WorldCom to the status of the second-largest long-distance telephone company in the United States and one of the largest companies worldwide (Moberg & Romar, 2008). "Aggressive" may be too mild a term: WorldCom spent over $60 billion in pursuit of 65 acquisitions between 1991 and 1997.

The planning function of management is often described as "looking ahead and charting future courses of action" by setting goals, but Ebbers' goal seemed mainly designed to inflate the company's stock price by any means possible (Planning function, 2009). By 1997, WorldCom's stock had risen from pennies to over $60 a share, and during the height of the Internet boom, it was a media darling. "As the stock value went up, it was easier for WorldCom to use stock as the vehicle to continue to purchase additional companies" (Moberg & Romar, 2008).

WorldCom's strategy of "acquire at all costs" was breathtakingly expansive not just because of the number of businesses it acquired, but because of the range of services involved. According to its own website at the height of its popularity, WorldCom provided communications services for tens of thousands of businesses, carried more international voice traffic than any other company, handled a "significant amount" of the world's Internet traffic, and operated a global IP (Internet Protocol) network in more than 2,600 cities, over 100 countries, and 75 data centers on five continents (Moberg & Romar, 2008).

Management Planning: Operations

The rapid acquisition of all these companies revealed the organizational weaknesses of Ebbers' strategy. Integrating businesses as large as MFS Communications and MCI Communications into WorldCom's fold proved an insurmountable challenge for Ebbers' slapdash management style. Customer service was one of the organization's greatest weaknesses — a critical flaw in a communications company, where millions of dollars can depend on reliable service. As one documented case illustrates: "One business customer's service was discontinued incorrectly, and when the customer contacted customer service, he was told he was not a customer. Ultimately, the WorldCom representative told him that if he was a customer, he had called the wrong office because the office he called only handled MCI accounts" (Moberg & Romar, 2008).

The internal infrastructure was equally dysfunctional. "Dozens of conflicting computer systems remained, local systems were repetitive and failed to work together properly, and billing systems were not coordinated" (Moberg & Romar, 2008). These operational failures made it nearly impossible to manage the sprawling enterprise effectively and compounded the financial misrepresentations occurring at the executive level.