Summary Of An Environment For Fraud

In his article “An Environment for Fraud,” Mike Jacka details the quick rise of telecommunications companies and the large amount of money that they brought in. In the 1980’s and before, telecommunications companies and long-distance carriers were very different from today. There was basically one company that had a monopoly on this business, AT&T. In the mid 1980’s the United States government gave final approval to break up this telecommunication giant. Because of this ruling AT&T was forced to lease long distance services, at a discount, to small, more local companies. These companies were able to resale the service for a profit while still providing a lower cost service than AT&T was able to provide. Of course, many investors saw this

The first one included companies like Sprint and AT&T. Tier two had WorldCom and the companies that were acquired by them. And the final one consisted of a large number of small consumers trying to take advantage of what they saw a very lucrative investment. Over 80% of the revenue at MCI came from the first two groups, but over 80% of the profit came from the third group. The first two groups bought and sold long-distance service form each other at a markup of less than 2% because of the relationships they shared among them. The third tier had no attachment to the larger group though and the markups were 100 to 200%. The profits from this third group kept growing exponentially, and the monthly accounts receivable in 1995 was more than $1,000,0000,000. The problem with this was that these third-tier clients did not have many assets and MCI only required a background check and criminal check as opposed to a down payment or security

In 1995 he was promoted to senior manager. At that time MCI had a budget for bad debt around $15 million a year. In 1996 the bad debt was $180 million. Pavlo was told to keep the budget for bad debt at $15 million and the company would “work through” the problem. Customers were allowed to sign promissory notes, invoices were re-dated, and questionable payment codes were used to indicate that a customer was sending a check soon. Some tier two companies would send monthly payments in for multi-million dollars and these payments were spread over tiny sub-accounts and remaining money was noted as unapplied cash. Over a period of time this unapplied cash account grew to over $50 million. After this amount was reached, the extra money was used to hide the company’s bad debt. Pavlo was given the freedom to transfer this extra money to bad debts and then reverse the transaction if the actual payment came