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Worldcom Case Study

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WorldCom Case Study

The problems with WorldCom are the lack of internal control, disordered corporate culture, management failure and the fraud accounting practices.
In this case, the EBITDA has been largely exaggerated. A $3.8 billion EBITDA overstatement became WorldCom’s accounting shame. For companies, EBITDA is a way to measure the results of operations excluding the effect of interest, corporate income taxes, depreciation and amortization of long-term assets. It provides a way to compare operating income among companies. Factoring out interest cost, taxes, depreciation and amortization can make unprofitable companies as WorldCom look like to be profitable. In my view, when using EBITDA as a valuation tool, one should not use it alone. A close look at the historical net income, the information derived from the cash flow statement and the balance sheet is also very important.
The failure of management and leadership was another crucial factor leading to the bankruptcy of WorldCom. First, the corporate culture enabled management to run an unchecked organization, allowing them to use tricky accounting to manipulate the numbers to meet their expectations. Bernie Ebbers (CEO) used the aggressive acquisitions to boost earnings, which were hastily done with overvaluing the acquired company. The improper valuation increased the company’s debt and decreased the revenue. Further, Ebbers borrowed millions of dollars from WorldCom as a personal loan and used his stock as collateral. What’s worse, Scott Sullivan (CFO) inflated revenues and under reported costs to provide a picture of continual growth and profitability, which made things worse. Secondly, for WorldCom, the lack of executive team’s ability and poor consolidated the acquired companies made the company hard to manage. Thirdly, the lack of detailed reporting and questioning made it nearly impossible for

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