Behind the Story: A Reporter's Notebook

Below are notes Andrew provided us as background information on several articles he has written recently about the telecommunications industry and their accounting practices that were compiled for a case study on “Accounting Fraud.” Click here to view the case study.

The failure of energy trader Enron and long-distance phone giant WorldCom taught investors a painful lesson: financial results can easily be doctored. Each company masked its ailing financial condition through creative accounting.

Had shareholders known sooner that WorldCom and Enron were struggling, they could have sold their shares rather than watch them become worthless.

As USA Today's telecommunications reporter, WorldCom's meltdown fell squarely on my beat. WorldCom, for example, used a number of accounting tricks to hide expenses and inflate profits, thus boosting its share price. Its disclosure of improper accounting, which totals $9 billion so far, led to its filing of the biggest bankruptcy-protection case in history.

WorldCom's collapse has cost investors tens of billions of dollars, caused jitters among many of its 20 million long-distance phone customers and inflicted pain across the telecom sector.

The collapse of WorldCom and Enron forced, investors, lawmakers, executives and regulators to look hard at the system that allowed such disasters to occur. This led to new scrutiny of the relationships between corporate officers, auditors, investment bankers and Wall Street analysts. Investors learned that conflicts of interest among these groups often prevented them from getting the information they need to make smart investment choices. What's more, the havoc wreaked by Enron and WorldCom showed the need for tougher laws, penalties and oversight to protect investors in the future.