Worldcom Scandal 2002 Case Study Business Accountancy: - Jaspreet - Krish - Raghav - Lakhshit - Naga
Worldcom Scandal 2002 Case Study Business Accountancy: - Jaspreet - Krish - Raghav - Lakhshit - Naga
Case Study
Business Accountancy
•Jaspreet
•Krish
•Raghav
•Lakhshit
•Naga
• About Bernie Ebbers
• Building of WorldCom
Worldcom’s History
About WorldCom
Table Of • WorldCom Peak 1999 (The Fraud)
Contents • Unravelling Of The Fraud
• Aftermath
• Consequences
• Key Events
• Bernard John Ebbers (August 27, 1941 – February 2, 2020) was a
Canadian businessman, the co-founder and CEO of WorldCom and a
convicted fraudster. Under his management, WorldCom grew rapidly
but collapsed in 2002 amid revelations of accounting irregularities,
making it at the time one of the largest accounting scandals in the
United States
• After high school, Ebbers briefly attended the University of Alberta
About and Calvin College before enrolling at Mississippi College on a
basketball scholarship. Between schools, he worked as a milkman and
Bernie bouncer. An injury before his senior season prevented him from
playing his final year and he was instead assigned to coach the junior
varsity team. In 1967, he received a Bachelor's degree in physical
Ebbers education, with an academic minor in secondary education, from
Mississippi College.
• Ebbers began his business career operating a chain of motels in
Mississippi .In 1983, in a coffee shop in Hattiesburg, Mississippi, he
and 3 other investors formed Long Distance Discount Services, Inc.
and in 1985, he was named chief executive officer. The company
acquired over 60 telecommunications firms and in 1995, it changed
its name to WorldCom
WorldCom’s History
• LDDS began operations in January 1984 with 200 customers. At first
LDDS had neither sufficient technical expertise nor the right
technical equipment (such as switching facilities) to win over larger
and more profitable companies.
WorldCom
scheme to inflate the company's assets. In January 2006, the
company, by then renamed MCI, was acquired by Verizon
Communications and was later integrated into Verizon Business.
( The Fraud)
expectations on growth and making the financial reports more
appealing. The initial fraudulent methods included
• changes to financial estimates,
• early revenue recognition,
• erroneous capitalization of the long term assets
• alteration of the reserves in order to improve the earnings
picture.
• The above frauds were not enough to boost the earnings that Ebbers
wanted. In 2000, WorldCom began classifying operating expenses as
long-term capital investments. Hiding these expenses in this way gave
them another $3.85 billion. These newly classified assets were
WorldCom expenses that WorldCom paid to lease phone network lines from
other companies to access their networks. They also added a journal
entry for $500 million in computer expenses, but supporting
Peak 2000 documents for the expenses were never found.
( The Fraud) • These changes turned WorldCom's losses into profits to the tune of
$1.38 billion in 2001. It also made WorldCom's assets appear more
valuable.
•In 2001, the internal audit team noticed accounting irregularities
spotted in MCI's books, the SEC requested that WorldCom provide more
information. The SEC was suspicious because while WorldCom was
making so much profit, AT&T (another telecom giant) was losing money.
• An internal audit turned up the billions that the WorldCom had
announced as capital expenditures as well as the $500 million in
Unravelling undocumented computer expenses. There was also another $2 billion in
questionable entries. WorldCom's audit committee was asked for
Of The
documents supporting capital expenditures, but it could not produce
them. The controller admitted to the internal auditors that they weren't
following accounting standards. WorldCom then admitted to inflating its
Fraud profits by $3.8 billion over the previous five quarters. A little over a
month after the internal audit began, WorldCom filed for bankruptcy.
•Cynthia Cooper, VP of Internal audit, questioned external auditors
about some dubious accounting transactions. The accountants who had
made the entries, and the auditors called these “pre-paid capacity” –
but no one could explain what this meant. These related to apparently
ordinary operating expenses which had been treated as capital
investment which is a fraud.
• This questioning by the internal audit team became a crucial issue at
WorldCom and an important contributor to its decline in share price.
If the audit committee and the board had acted more quickly, then
confidence in WorldCom’s accounts might have been maintained.
• Sullivan was sacked as CFO on 24 June 2002. Two days later it was
reported that WorldCom had overstated its cash flow by more than
$3.8 billion during the previous five quarters, which was referred to as
‘one of the largest cases of false corporate book keeping yet
•While the debtors of WorldCom were protected from some losses,
Within days, the stock of not so long ago major player in the
telecommunication industry fell well under $1.
•The consequences of the bankruptcy were severe for shareholders,
who lost virtually all their investments, and many employees lost their
jobs. Creditors also lost out.
• At the time of the bankruptcy, substantial numbers of employees were
Consequences laid off and it was predicted that the shareholders would receive
nothing for their shares. For employees who also held WorldCom’s
shares, the bankruptcy was a double blow.
•By the same token, 17,000 WorldCom employees lost their jobs
together with insurance and pensions, which have collapsed along with
the share price. Three years after the fraud was revealed, Bernard
Ebbers, who had already left the company’s CEO position, was found
guilty and sentenced to 25 years of prison for the charges of fraud,
conspiracy and filing false documents.
• WorldCom’s fraudulent activities gradually took its toll on the entire
U.S. telecommunications industry. Equipment manufacturers such as
Lucent Technologies, Nortell Networks, and Corning which had
initially been benefitting from WorldCom’s fictitious profitability and
projections ultimately suffered with depressed stock prices and were
forced to lay off work forces, too.
• WorldCom’s then larger rival, the telecommunication company AT&T
(American Telephone & Telegraph) had been laying off tens of
thousands in the late 90’s as it was trying to match WorldCom’s
phantom profits
• The Sarbanes-Oxley Act (SOX) was enacted in July 2002 was shortly
passed after this scandal to restore investors' confidence in the
financial markets and close loopholes that allowed public companies
to defraud investors. By the end of 2003, it was estimated that the
company’s total assets had been inflated by about $11 billion; making
the WorldCom Fraud the largest accounting fraud in American history
at that time.
• 1983 – LDDS (Long Distance Discount Services) created
• 1985 – Bernie Ebbers appointed chief executive officer of LDDS
• 1992-Scott Sullivan joins LDDS
• 1994 – Scott Sullivan promoted to chief financial officer
• 1995 – LDDS changes name to WorldCom
• 1998- WorldCom completed takeover of MCI