Worldcom Experience

Comment on the ability of the markets and its participants to accurately evaluate risk and reward in view of the WorldCom experience. Did the market fail in this case? What changes in process and policy could have led to other outcomes?

Investors have always been very clear in stating that they will not participate in a company’s offering without having all the information necessary to make a decision. Investing cannot be an act of faith, it’s a rational process built on an assessment of risk and rewards. If investors feel there is a lack of candor in an offering, they will respond accordingly. Transparency is required in this system of operations, which can lead them to easily making up their minds as to whether the investment is credible. With WorldCom’s filed the biggest bankruptcy ever in the U.S. History in 2002; along with filling a Chapter 11 Bankruptcy due to Fraud, accounting misstatements, board of director’s failures and managerial issues after merge (WorldCom Website). When the WorldCom scandal eroded confidence in America’s financial markets and Accounting firms, there was a demand for stronger regulation to restore confidence. Congress and the White House saw the need for action, as the result of the stock market continuing to plummet. Congress rushed to pass the complicated Sarbanes-Oxley Act before the August recess (Oxley, 2007). Once the accounting board begins operation, its job will be to register, oversee, investigate, and discipline all accounting firms that audit public companies. The new law also instructs the board to set auditing standards to be used by these accounting firms — a crucial point if auditors are going to be more successful in uncovering future efforts at corporate fraud. Sarbanes-Oxley also managed to restore investor Confidence because it rebuilt and strengthened the foundation of corporate governance, transparency and accountability (Oxley, 2007).

Changes in the Accounting Policy were necessary for WorldCom to endure such a difficult time. They should have taken up the financial audit by unrestricting the internal audit department. The next reasonable step would have been for them to buy back shares; this would have created a demand in the share market leading to the increase in the prices of stock. Another suggestion could have been to file a “bail-out” of the company rather than filing bankruptcy; this could have resulted in increased valuation of the company and levied legal charges. . Key performance of the company should be the gauge for directors’ salary and reward instead of stock market.

The most important change to policy should have been the integrating Books of Accounts; this would have promptly prepared a meticulous accounting plan of integrating resources, billing systems, inventories which would further help in optimal commercial utilization of the acquired resources (Moritz, 2004).

Assign responsibilities for the market failures to the

...