Case Study: Worldcom

Agency problems are problems that arises due to conflicts of interests between a principal and his an agent. An agent is hired by a principal and is supposed to act on behalf of the principal for their own interest with the aim of maximizing the wealth of the principal. However, sometimes, the agent also has his own interests, where he may diverge from working for the principal interest and he will work for his own benefit. In corporate finance, there are two types of agency problems: between shareholders and managers which is the most common one, and between bondholders and shareholders.

To begin with, As mentioned earlier the most common agency problem usually happens due to a conflict of interest between a company`s management and the stockholder

WorldCom was established as a small company known as Long distance discount services in 1984 but under the management of Bernie ebbers LLLDS grew to be one to the biggest tele-commutation companies in the whole world. WorldCom had 85000 workers and it operated in more than 65 countries.

WorldCom was known to the public that it was a strong company that had a rapid growth in the market and in reality the appearance was nothing than a perception. In 2002 the company revealed to public that it had been involved in fraud by cooking their books. They stated that they had a $3.8 billion profit in their income statements but in fact they encountered $0.5 billion loss. An Investigation was conducted by the SEC and they concluded that a total of $11 billion in misstatements was revealed

The CEO of the company instructed his employees to record long distance line costs which Is the second largest expense for any tele-commutation company as prepaid capacity in the balance sheets as assets this was done in order to increase the net income which will result to a significant profit not only they recorded it as an asset they rounded the figures to the nearest dollar

Shareholders of the company lost all of their money that was invested in WorldCom which $180B, The debtholders lost $37.5B of debt value, the company reached to an agreement with the SEC to settle this case for $750M and in order to settle with the securities class action case twelve of the members of the board of directors had to pay $25M out of their own money. Unfortunately the innocent employees who had no idea about the scandal lost their jobs in addition to their healthcare and retirement funds. All of loans given to WorldCom defaulted as a result of their bankruptcy. The CEO Bernie ebbers was sentenced to 25 years in prison for this roles the biggest accounting scandal in USA history. The scandal also effected its competitors since they had had to fire around 20000 employees to maintain their equal market position with world