WorldComm & SKS_1.3

8/2/2019 WorldComm & SKS_1.3

1/40

Case Study on

WorldComm & SKSMicrofinance


2/40

Group Members

0 Krunal Desai

035 Priyam Modi

103 Nikhil A.

124 Gaurav Mehta

159 Hetal Gutka


3/40

Background on WorldComm

Mal Practises @WorldComm

Background of SKS Microfinance

Mal Practises @SKS Microfinance

Learning's form Cases

Content of Presentation


4/40

Background on WorldComm


5/40

WorldCom: Corporate Fraud


6/40

WorldCom Background

Bernie Ebbers is the

founder of WorldCom. Huge

telecommunicationscompany

Largest in the U.S.

Held responsible forwaking up its

somewhat sluggishindustry in the early90s


7/40

INDUSTRY

Telecommunications giant

Provided:

Internet Services

Long Distance and various other phone servicesfor a cheaper price than competitors.

WorldCom took the telecom industry by storm when it

began a frenzy of acquisitions in the 1990s.


8/40

WorldComs Ascension

From 1995 until 2000, WorldCom purchased over

sixty other telecom firms. In 1997 it bought MCI for $37 billion.

WorldCom moved into Internet and datacommunications, handling 50 percent of all United

StatesInternet traffic and 50 percent of all e-mails worldwide.

By 2001, WorldCom owned one-third of all datacables in the United States. In addition, they were thesecond-largest long distance carrier in 1998 and

2002.


9/40

THE SCANDAL

They classified over $3.8billion inpayments for line costs as capitalexpenditures rather than current

expenses.

Irregularities in the reserveaccounts.

SEC claims that the total forfraudulent accounting comes to $9billion dollars.


10/40

WorldComs fall

The company began to fall in 1999 withmassive lay offs and the steady declineof its stock price.

Stock prices for WorldCom were around60 dollars and dropped to pennies in2002 giving sleepless nights to investors.

Business sector mergers wereunsuccessful.


11/40

The stock price had fallen from around 60$ in1999 to $1 in 2002


12/40

Chief Financial Officer Scott Sullivan andController David Myers arrested. Myers pleads guilty to three counts of

conspiracy Chief Executive John W. Sidgmore steps aside

from his post Buford Yates Jr. pleads guilty to two counts of

securities fraud and conspiracy

Upper Management

Betty L. Vinson and M. Normand, former finance

officials, are charged with conspiracy. Six other WorldCom directors resign on

December 18th


13/40

Bernard Ebbers, CEO Borrowed $366 million to

cover losses on stock whichwas not repaid

Secured loans fromWorldCom to fund personal

investments including a $100million Canada ranch, $658million in Mississippitimberlands and a $14 millionGeorgia shipyard

Netted $140 million from stocksales

Facing dismissal, he resignedfrom WorldCom on April 30,2002

Bernard Ebbers , CEO


14/40

Scott Sullivan, CFO

Served as CFO, treasurer andsecretary

Directed staff to make falseaccounting entries

Personally made false andmisleading public statements

regarding finances

Netted $45 million from stocksales


15/40

Mal Practise @ WorldComm


16/40

Four Aspects of WorldCom Fraud

1. Improper release of accruals.

2. One time, top-side entries of undocumentedrevenue, recorded as unallocated corporaterevenue.

3. A close the gap approach to day-to-day

accounting decisions.

4. Capitalization of line costs.


17/40

First Aspect:Improper release of accrualso Directed by senior members of the corporate finance

organization

o Occurred in the weeks following the end of the quarter inquestion.

o The timing and amounts of the releases were not supported bycontemporaneous analysis or documentation.

o WorldCom employees involved in the releases generallyunderstood at the time that they were improper.


18/40

Second Aspect:

Topside Entry of UndocumentedRevenueo Beginning in 1999, WorldCom personnel made large revenue

accounting entries in order to report that it had achieved thehigh revenue targets.

o Most of the questionable revenue entries were booked toCorporate Unallocated revenue accounts.

o The questionable revenue entries included in CorporateUnallocated often involved large, round-dollar revenue items.

o They generally appeared only in the quarter-ending month,and they were not recorded during the quarter, but instead inthe weeks after the quarter had ended.


19/40

Third Aspect: Close the Gap Accounting

Strategieso Throughout much of 2001, WorldComs Business

Operations and Revenue Accounting groups trackedthe difference between projected and target revenue

and kept a running tally of accounting opportunitiesthat could be exploited to bridge that gap.


20/40

Fourth Aspect:

Capitalization of Line Costso One of major operating expenses relates to its Line

costs, fees its pays to 3rd party telecom networkproviders for access to their networks.

o World Comm capitalized this fees terming them asinvestments, while they were one of most day to day expenses.

o Nearly it could show its $4 billion expense as assetby means of investments.


21/40


22/40

How the Fraud took place

Summary ofImproperIncome statement amounts ($ in millions)

1999 2000 2001 2002 Total

Revenues $ 205 $ 328 $ 358 $ 67 $ 958

Line Costs $ 598 $ 2,870 $ 3,063 $ 798 $ 7,329

Other Expenses $ 135 $ 676 $ 177 $ (25) $ 428

Total $ 938 $ 3,874 $ 3,598 $ 840 $ 9,250


23/40

Impact of the Fraud (1/3)

Shareholders$180B of shareholder value lost (based on peak stock price)

Debt & Preferred Stock holders$37.5B of debt and preferred stock holder value lost

Company

$750M settlement paid to SEC

Employees-57,000 employees lost jobs- All current and former employees lost most of their retirement

savings (invested in WorldCom stock)

*SEC - U.S. Securities and Exchange Commission


24/40


25/40

Impact of the Fraud (3/3)

Executives and Accounting Staff

6 individuals convicted of fraud / conspiracy / false filings

Ebbers CEO 25 years in prison

Sullivan CFO 5 years in prison

Myers Controller 1 year in prison

Yates Dir of Acctg 1 year in prison

Vinson Acctg Dept 5 months in prison

Manager 5 months house arrest

Normand Acctg Dept 3 years probation

Manager

Above 6 individuals agreed to pay a total of $24-34M to settlesecurities class action case

Independent AuditorArthur Andersen agreed to pay $65M to settle securities class action caseInsurance Companies

Agreed to pay $36M to settle claims against WorldCom directors andofficers


26/40

Post-Fraud Happenings

17,000 jobs cut to save $1 billion.

WorldCom may write off $50.6 billion in intangibleassets.

Added additional board members to serve on a specialinvestigative panel to review accounting practices:

Former US Attorney General Nicholas Katzenbach Dennis Beresford, Former Chairman of the FASB

WorldCom is trying to secure loans

WorldCom was renamed MCI in 2004 when it emerged

from bankruptcy Possible court-approved debt reductions

Company could spin off several business units


27/40

Background on SKSMicrofinance


28/40

Introduction

SKS Microfinance Limited (SKS) is a non-banking finance company (NBFC),regulated by the Reserve Bank ofIndia.

SKS claims its mission is to eradicate povertyby providing financial services to the poor.

The company operates across these 19states ofIndia


29/40

Numbers !!!

According to a CRISIL Report on Top 50 IndianMicrofinance Institutions (MFIs), SKS Microfinance isthe largest MFI in India.

Founded in 1997 by Vikram Akula, SKS as ofDecember 31, 2010, has 7.7 million clients (2010) in2,403 branches in the 19 states across India .

SKS charges an annual effective interest rate between

26.7% and 31.4% for core loan products. At the endof 2010's financial year on 31 March 2011, thecompany listed a gross loan portfolio of US$925,844,433 with 6,242,266 female active borrowers.


30/40

Motive

SKS's hopes to serve 50 million householdsacross India and other parts of the world.

The hope is that much poverty can be alleviated

by providing financial services to low-incomehouseholds.

They are able to expand the business to reachfurther villages by charging a small interest

rate, one that clients are willing to pay in orderto avoid starvation, poor money management,or government loan sharks.


31/40

Operations

SKS Microfinance follows the Joint Liability

Group (JLG) model. The methodologyinvolves lending to individual women,utilizing five member groups where groupsserve as the ultimate guarantor for each

member.SKS Microfinance offers 8 financial products

and services to its clients.

SKS has had to raise money from severaldifferent companies and individual sponsorsin order to help these women.


32/40

|SKS MICROFINANCE FOUNDER AND

CHAIRMAN VIKRAM AKULA RESIGNS}


33/40

SKS microfinance goes public

On July 28, 2010, SKS Microfinance, made its debut onBombay Stock Exchange, offering its shares to th

Microfinance pioneer and Nobel Laureate, Dr.Muhammad Yunus had raised several concerns overSKS Initial public offerings.

He was of the view that an IPO gives wrong signals thatthere is lot of money to be made in microfinancewhereas the main purpose of it was to help the poor.


34/40

Problems with SKS

An allotment of shares to Catamaran Management

Services Pvt. Ltd, a venture capital firm set up byInfosys co-founder N.R. Narayana Murthy, at a pricewhich was less than 50% of the price discovered by themarket a few weeks earlier when Akula signedagreements to liquidate all his holdings to Singapore-based Treeline Asia Master Fund Pte Ltd.

the detriment of the interests of the pre-IPO shareholders,which included the Mutual Benefit Trusts (MBT)representing poor women borrowers

CEO Suresh Gurumani was asked to resign soon after the

IPO.One of the key issue was difference in opinion between

Akula and Gurumani regarding diversification of SKS.

Later on surprisingly V.Akula was eased out of the boardon the grounds of incorrect removal of S.Gurumani


35/40

Problems with SKS

Board of SKS boasts of good number of independent

directors, representatives of institutional investors (alsoa Harvard University Professor who specializes inCorporate Governance!!!)

It has no representation for owners-cum-beneficiaries,the MBTs that represent the poor customers who arealso shareholders of the company

A significant factor to be noted was none of the boardmembers had any personal stakes of significance.Therefore, if the market price crashes, they would not

lose any of their personal money.This meant all of them were eligible for options, so they

would benefit from any upside However, when it cameto a crisis, the downside of the individuals was zero.


36/40


37/40

Insert texthere

Insert texthere

Insert texthere

Insert texthere

Insert texthere

Insert texthere

Insights


38/40

Bibliography

Wall Street Journal: SKS Microfinance Director Suresh GurumaniResigns, May 28, 2011www.livemint.com: Governance lessons from SKS, Tue, Dec 13 2011

On Microfinance: Who's toB

lame for the Crisis in Andhra Pradesh?,B

yElisabeth Rhyne, ACCION's Center for Financial Inclusion, TheHuffington PostSKS Microfinance, http://www.sksindia.com/downloads.pdfJustin Oliver, Whos the Culprit? Accessing Finance in Andhra Pradesh,CGAP (November 11, 2010) available at

(http://microfinance.cgap.org/2010/11/11/who%E2%80%99s-the-culpritaccessing-finance-in-andhra-pradesh/)Capitalism vs. Altruism: SKS Rekindles the Microfinance DebatePublished: October 07, 2010 in India Knowledge@Wharton


39/40

Bibliography

First Interim Report of Dick Thornburgh, Bankruptcy Court Examiner United StatesBankruptcy Court Southern District of New York re. WorldCom, Inc. (November 4, 2002)Report ofInvestigation by the Special Investigative Committee of the Board of Directors ofWorldCom, Inc. (March 31, 2003)Second Interim Report of Dick Thornburg, Bankruptcy Court Examiner (June 9, 2003Why good managers make bad ethical choices by Saul W. Gellerman Harvard BusinessReview (July August 1986)Order to Commit Fraud, A StafferBalked, Then Caved by Susan Pulliam Wall StreetJournal (June 23, 2003)Ebbers Is Convicted in Massive Fraud by Almar Latour, Shawn Young and Li Yuan WSJ(March 16, 2005)At Center of Fraud, WorldCom Official Sees Life Unravel by Susan Pulliam WSJ (March24, 2005)WorldComs Myers Gets One-Year Prison Term by Shawn Young WSJ (August 10,2005)WorldComs Sullivan Gets Five Years in Jail by Dionne Searcey and Shawn Young WSJ

(August 11,2005)Settlements WorldCom Securities Litigation www.worldcomlitigation.comhttp://business-standard.com/india/news/3-cheers-for-corporate-governance-/456851/


40/40

Thank you!

Questions?

WorldComm & SKS_1.3

Documents

Transcript of WorldComm & SKS_1.3