WorldCom Case Study Analysis People Involved in scandal:

CEO: Bernard Ebbers CFO: Scott Sullivan Controller: David Myers Director of accounting: Buford Yates Account Department Manager: Vinson Account Department Manager: Normand

The treatment of line costs as capital expenditures was discovered by WorldComs internal
auditor, Cynthia Coop and Glyn Smith. Investors lost about 180 Billions $. 1983 WorldCom started as LDDS Company (Long Distance Discount Service).

Past jobs for CEO: Basket Ball Coach, motel business owner, he is notorious as penny puncher. LDDS started to attract investors quickly. LDDS started to buy other companies, after 10 years LDDS capital is 6 billions and named as WorldCom. WorldCom bought MCI that total revenue is 18 Billions while WorldCom is only 7 billion. WorldCom is a good place to work and the CEO rocks, in 1999 CEOs salary was 935 k, received about 27 million incentives as stock options. WorldCom started aggressive acquisitions of competitors as a strategy in addition to cost control. CEO was mean with the employees and in the same time was spending money improvidently on his personal life. As someone said it might be easier to talk about what he didnt buy, examples, 132 yachts, hockey team, yakhut building company, 500 000 acres in Canada and golf course. All the money needed to buy the former mentioned items was provided by Banks loans (JP Morgan and Citi bank) secured by WorldCom stocks. Loans total is 408 millions. CEO expected that the future of WorldCom is still better. In 2000, Telecom industry business is storming (Check Why?): In June 99 WorldCom share price is 62 $ At end of 2000 WorldCom share price is 18 $ In 2001 WorldCom share price is 10 $. In 2001, CEO spoke to public claiming that the good days yet to come. Banks started to ask the CEO to pay back the loans, CEO in trouble, in order to pay he started to sell his WorldCom stocks, investors took this as a sign of poor performance particularly for the future. SEC (security and exchange commission) started to review WorldCom financial statement because they look great while the industry is shaking. March 2002, CEO still denies that WorldCom facing any problems. At April 2002, BOD asked CEO to resign, WorldCom share price is 2$.

Scandal: 11 Billion accounting fraud, total assets is overstated, bankruptcy with 5.7 billion in debt, companies lease for phone lines are booked as CAPEX, when you capitalize something, you recognize the expense over much longer period. Ordinarily, this expense is considered as OPEX which deducted on monthly bases, thus it lower the monthly income of the company. This made WorldCom looks healthier. Phone lines move to the balance sheet as assets and expense them on 7, 10 or 15 years through depreciation and amortization instead of having them on income statement as expenses, so the expense of the given period is fewer and the income is greater, WorldCom overstated its profits by 3.8 Billion (disguised expenses). WorldCom created illusionary earnings. Trial held at 2005 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 Manager 5 months in prison 5 months house arrest Normand Acctg Dept Manager 3 years probation Above 6 individuals agreed to pay a total of $24-34M to settle securities class action case.