W Inc. adopted aggressive acquisition strategy to increase the value of the firm to stakeholders. It evolved from a small long distance telephone company into a significant player in telecommunication industry that provided global communication services and handled worldwide internet traffic. In six years of time it spent $60 billion in acquisition of 65 companies in the industry, of which several large ones, and accumulated $41 billion in debt. Wall Street analysts and brokers not only made “strong buy” recommendation of it but also became close friends with Sr. executives of W. One of W’s significant acquisitions was Company M, who’s a major supplier of internet services to businesses. However, some problems also appeared along the mergers/ acquisitions. For example, customer service deteriorated. One business customer's service was discontinued incorrectly, and when the customer contacted customer service, he was told he was not a customer. Ultimately, the W Inc. representative told him that if he was a customer, he had called the wrong office because the office he called only handled M’s accounts. W Inc. also closed three important M technical service centers that contributed to network maintenance only to open twelve different centers that were duplicate and inefficient. Some local service companies that W purchased were expensive and highly underutilized after acquisition. Regarding financial reporting, W’s CFO used a liberal interpretation of accounting rules when preparing financial statements. W would write down in one quarter millions of dollars in assets it acquired while, at the same time, it included in this quarter charge against earnings the cost of company expenses expected in the future. After acquisition of M, while reducing the book value of some M’s assets by several billion dollars, the company increased the value of "good will," brand name, for example, by the same amount. For a considerable time period, management also chose to ignore credit department lists of customers who had not paid their bills and were unlikely to do so. A sr. line manager complained to internal auditor that the CFO had usurped $400 million reserve account set aside as hedge fund for rainy days, the CFO first asked the auditor to stay out of this matter, then later asked the audit to be delayed for another 6 months. So long as there were acquisition targets available W could continue these practices. The stock price was high, and accounting practices allowed the company to maximize the financial advantages of the acquisitions while minimizing the negative aspects. W and Wall Street could ignore the consolidation issues because the new acquisitions allowed management to focus on the behavior so welcome by everyone, the continued rise in the share price.
1. How is company W doing, what do you think?
2. What kinds of financial advantages W may gain from its accounting strategies as stated in the case?
3. What are the major challenges that the company were facing?
4. Any risks posted from its operation and financial strategies?
5. If you identified risks, which one of them are most critical and what kind of protections that may be put in place?
6. What would you do if you were the internal auditor in the case? 7. What negative consequences could happen as a result of W’s operation?