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Quiz 1 a) The corporate strategies

WorldCom was a long distance phone services provider to companies and residents. It initially had

started as a small scale company that was then known as Long Distance Discount Services (LDDS)

and later escalated to becoming one of the largest telecommunication companies in the United

States. The rapid growth was due to the management of the CEO, Bernie Ebbers. The company

was present in more than 65 countries with 85,000 employees .the outside world perceived

WorldCom as a strong leader in the communication sect, but in reality, the company was nothing

but a perception. It was involved in fraud in June 2002 when it stated that it had made profits

amounting to 3 billion dollars when in the real sense after investigations were conducted by the

firm, it had instead made losses totaling to almost half a billion whereby misstatements indicated

11 billion dollars. The following are the corporate strategies that the company was pursuing;

The culture of the company

The strategic plan of WorldCom Company was to grow without acquisition was reinforced

by the top managers. An aggressive and competitive culture was created by the pressure that was

created by the topmost managers. The culture did not contain any ethics of honesty and

truthfulness. One employee of the company admitted that the company was not a good place to

work for due to the pressure that was enforced. The employees were forced to work for long hours

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although there was compensation. A board of directors that is often actively involved in the

activities of an organization is a vital tool in the internal control of the company (Romney

&Steinhart 2008). The board of directors in WorldCom came from different backgrounds and

including individuals who had experience and in legal issues while others were made members

due to the connection they had with the CEO.

Annually, the board only met four times which is not expected of a company growing at

that rate. Furthermore, the board was only paid some small compensation which was depended

upon the company’s stock and growth. However, the board of directors was very influential in

approving and disapproving the decisions made in the company. The approvals of the BOD

allowed the company to grow (Watkins, 2003).

The strategy at Enron

Enron employed a variety of strategies while undertaking its activities. It was perceived as

the most innovative company, and therefore it developed a strategy of creating the culture. The

company often recruited the best employees to join their team. The company due to the stiff

competition with banks and other institutions’, recruited the best and the brightest scientists and

engineers so that it remained to be at the top quite often. The employees were lured by the promise

of bonuses that were 100% as much as their salaries. After employment, the employees were

granted the opportunity to shift to departments where they felt that they could add more value.

Enron employed was evaluating and developing its employees through a biannual system that was

created for the purpose. The system was made to provide feedback from employees, customers,

peers and the supervisors. A performance review committee that consisted of 20 people used the

information to sort the employees into six categories based on the value they submitted to the firm.

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The point of assessing by the PRC was to make sure that all employees were constantly adding

value to the company.

The strategy at Lehman Brothers

The Lehman brothers are a company that had approximately 700 billion dollars in assets

but became the largest bankruptcy in the United States. Dick Fluid set aggressive agenda for the

company with strategies, for example, he wanted his employees to act like the owners of the

company. He believed in the goal of employee ownership.

In the year 2006, the company implemented a strategy to pursue growth as the main agenda.

It pursued to be more aggressive while using the company’s capital base in making the principal

investments. The company believed that it is a growth firm that was surviving in the growth sector.

Therefore, they were dedicated to growing their balance sheet. The key factors that drove the

company was (1) growing in the global economy (2) disintermediation in capital markets and (3)

the capabilities of the firm growing its share of industry fees and revenue.

The activities that led the companies to fall from the top

Enron

The Company founded as a provider of natural gas, emerged to be the major provider of

energy in the market. The Company achieved this through the building of trading centers to provide

energy in various places around the world and in 2001; the firm had operating capital of $100.8

billion as well as earnings of $979 million. Following the profits the Company had earned, Fortune

magazine indicated that Enron was among the innovative industries and that investors were

yearning for it. A year later, the Company had a bad reputation which made its key executives

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leave claiming that the firm had violated the accounting rules which made the stock to decrease.

The activities of the Company are said to be compromised with some factors both internal and

external.

First, the Company claimed that it had miscalculated its income and that what had been

presented on the balance sheet was not the actual figure. The Companies’ income was a few million

less than what had been indicated. The problem was revealed to be a result of the joint ventures

the firm had engaged with other Companies. Enron, therefore, concealed large debts and losses of

the business in the form of those partnerships. Consequently, Arthur Andersen who was the firm

that reviewed Enron books is claimed to have an impact towards the Companies’ fall. Arthur

Andersen was unable to realize the problems that were being experienced in the books.

Moreover, Enron faced the challenges of the venture business. The Company after being

declared bankrupt, a rival firm canceled the deal to buy Enron which made significant partners of

Enron stop their Joint venture. Dynegy who had settled to take over Enron claimed that the firm

might be having more financial problems which are yet to be exposed. The situation thus

compromised the firm leading to laying off 21000 employees.

WorldCom

The Company filled the bankruptcy security which was in the constitution. From 1999 to

2002, the firm had overstated its income with $7 billion as well as $82 billion more of its asset.

The bankruptcy of the firm endangers customers as well as the government operations such as

Federal Aviation. WorldCom was affected by the following issues.

The internal audits which were headed by Cynthia Cooper and other members revealed the

inappropriate expenditures of the organization. In Coopers audit exposed that WorldCom had an

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expenditure of $2.3 billion yet the operation and technology team of WorldCom indicated an

expenditure of $ 2.9billion. Later, Cooper followed the calculations of the Company spending and

realized that $3 billion was questionable as well as $500 million on Computer operating cost. On

20th June 2002, Copper and her team exposed that there were wrong capital expenses of the firm.

On 25th, the Company publicized that the earnings had been overstated by $3.8 over the past five

years (Sidak, 2003).

Arthur Andersen, a self-regulating auditor for WorldCom since 1990 to 2002. Andersen

analyzed the expenditure concerning payroll, projects as well as spare parts of WorldCom firm.

Andersen’s software examining risk management rated WorldCom as having high risk, but the

auditors claimed it to be a maximum risk. Andersen review panel for WorldCom modified the

information and rated the firm as moderate risk.

The board of directors which was made up of owners as well as directors from acquired

firms by WorldCom. The board interacted with WorldCom during meetings which were to occur

four or six times in every year. The information presented to then during meetings was manipulated

by Sullivan. Such information was about capital spending, the cost incurred as well as the profits

made. Consequently, an investigation by the committees claims that the board of managers was

distant as well as isolated from the firm’s activities. The board is thus perceived to play a little role

towards the achieving of the Companies aims and objectives.

Lehman Brothers

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Dick Fuld in 2015 presented a speech to investors explaining about the bankruptcy of

Lehman Brothers in 2008. Dick claimed that the agenda by the government to enhance the home

possession of the firm was a significant blow towards the bankruptcy. The financial statement of

the Company was subjected to liabilities just like any other firm. The financial crisis by the

American subprime mortgage in 2008 had negative impacts towards the global monetary market.

The collapse of Lehman Brothers led to the disruption of $10 million within the market

(McDonald, et al 2010).

The lack of buyers by Lehman is viewed as a drawback to the firm. Unlike other

organization such as Washington Mutual and Merrill Lynch were never declared bankrupt as they

had buyers. The American bank was interested in obtaining Merrill Lynch, but Barclays sought to

have Lehman. The British regulators, however, cancelled the deal which is said to have impacts

on Lehman. Also, the perception that Lehman was undergoing loses as well as it had no buyers

made the Federal Reserve decline its loan to the firm yet it was the only option.

3. Explain how Sarbanes-Oxley and Dodd-Frank would have helped to prevent or limit the

problems.

There is a provision of the act that falls under section 404 of Sarbanes-Oxley which requires

any senior officers of a public Company to satisfy the competence of internal control systems.

Additionally, the assertion of the management should be audited and certified by an external

auditor (Act, 2002). Having this act in mind, it could have helped in avoiding the problem caused

by the operation and technological team of audits. The internal audit team miscalculated an

expenditure of $2.9 billion, yet Copper and her team had an expenditure of $2.3 billion. Also, the

$500 million that was questionable to be used on Computers cost resulted from the technological

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audit teams. If Cooper and external audits were given a chance to examine the competence of

internal technology audits, then such a problem would not have occurred.

The Sarbanes-Oxley Act in one of the amendments that failed to be passed provided that

CEOs of any Company certify personally that the financials of the firm were accurate and

complete. The provision would have solved the miscalculation made on the balance sheets of

Enron firm. Rather than depending on internal audits who work the books of organization and

certifying the statements, it would be much better if the CEOs would have a close follow up on

certifying such statements.

After the Sarbanes-Oxley Act was passed in 2002 following the Enron scandal, the

whistleblowers were to be protected after uncovering fraud within firms. Following arguments

concerning the act led to the formation of Dodd-Frank Act that was to offer financial rewards to

the whistleblowers. It was, therefore, a kind of encouragement to workers who exposed frauds thus

avoiding economic problems to firms. Also, the Dodd-Frank created the financial stability

oversight council that was to regulate the finances as well as the risk of Companies. This organ

could have thus monitored the financial statements of both Enron and WorldCom companies from

miscalculating its capital expenditure.

Dodd-Frank Act gave Federal Deposit Insurance the ability to liquidate Companies. It was

with a purpose of avoiding Companies from financial failure and bankruptcy. Firms were also

required to develop plans that could help them overcome their failures without interfering with the

entire monetary system. The Act could thus help Lehman Brothers to manage its finances and

prevent it from being bankrupt.

The requirements of the Oxyl

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Section 301of the act requires that there be an establishment of a complaint mechanism

that was confidential and independent where employees could raise issues related to accounting.

Section 404 required that the senior officers of any public company certify the competence of the

internal control (Menzies, 2004). It also provides for the management to be audited by the external

auditor.

The act requires that the committee dealing with the audit approves any audit services or non-audit

services in advance before they are rendered. Under title three of the act, there is a requirement

that offers auditor independence in that any other audit firms are prohibited from activities like

bookkeeping for the clients.

The requirements of Dodd-Frank Act

The Act provided for the regulation of derivate, for example, credit default swaps. The

credit default swaps had been hugely blamed for the financial crisis that happened in 2008. This

was because they were conducted directly over the counter.

The Dodd-Frank also provided for Securities and Exchange Commission SEC office of

credit ratings. This was because the agencies that were involved in credit rating were accused of

misleading the public with investment ratings hence leading to financial crisis. The office was

therefore meant to ensure accuracy within the agencies to enhance meaningful credit ratings for

the company (Reform, et al 2010).

Explain why the problems occurred even with Sarbanes-Oxley act

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The problem occurred at the Lehman brothers because the company used a trick known as

Repo 105. The practice involves banks using the owned security as collateral for a short-term

loan. The Lehman Brothers, however, used the repo deals in the pretense of selling securities at a

profit (Wilmarth, 2010). Thus the firm’s finances looked rosy after each quarter. Through the repo

deals, the company repurchased the securities and even repeated when it felt like doing so.

Works cited

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Act, S. O. (2002). Sarbanes-Oxley Act. Washington DC.

McDonald, L. G., & Robinson, P. (2010). A colossal failure of common sense: The inside story of

the collapse of Lehman Brothers. Crown Business.

Menzies, C. (Ed.). (2004). Sarbanes-Oxley Act. Schäffer-Poeschel Verlag.

Reform, D. F. W. S. (2010). Consumer Protection Act. Public Law, 111, 203.

Sidak, J. G. (2003). The failure of good intentions: The WorldCom fraud and the collapse of

American telecommunications after deregulation. Yale J. on Reg., 20, 207.

Watkins, S. (2003). Former Enron vice president Sherron Watkins on the Enron collapse. The

Academy of Management Executive, 17(4), 119-125.

Wilmarth Jr, A. E. (2010). The Dodd-Frank Act: A flawed and inadequate response to the too-big-

to-fail problem. Or. L. Rev., 89, 951.

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