Founded in 1983 by Bernard Ebbers, David Singleton & Murray Waldren It was initially Called as LDDS- Long Distance

e Discount Service

On 25th may 1995, the company officially changed its name to WorldCom

 Series of more than 60 merger and acquisition In 1998, the company made its biggest Acquisition paying a price of approximately $40 billion for the well-known long distance provider MCI One of the largest telecom player in the world Stock Price was Climbed to $64.51 in 1999

From 1998-2000, WorldCom reduced reserve accounts held to cover liabilities of acquired companies

WorldCom added $2.8 billion to the revenue line from these reserves

Reserves didnt cut it; An e-mail was sent in December 2000 to a division in Texas directing misclassification of expenses. CFO told key staff members to mark operating costs as long-term investments. $11 Billion Accounting Fraud over 3 year period (1999 - 2002) Accounting Fraud occurred in two main forms:

To the tune of $3.85 billion.

Understatement of operating expenses of $7B through improper release of accruals and through improper capitalization of operating expenses Overstatement of revenues of $1B.

Summary of Improper Income 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

6.

June 14, 2002 - The Internal audit team contacted WorldComs audit committee Internal auditor, Cindy Cooper, asked for documents supporting numerous capital expenditures.

7.

No supporting documents were found

8. The controller admits to internal auditors that the accounting treatment is wrong

States no accounting standards support this accounting

9.

June 20, 2002 - Internal audit explains irregularities to the Audit committee.

10.

June 25, 2002 - WorldCom announces it inflated profits by $3.8 billion over the previous five quarters
June 26, 2002 - civil suit filed, stock trading halted Ultimately, stock was delisted by Nasdaq July 21, 2002 - WorldCom filed for bankruptcy

11.

12.

Corporate culture Inorganic growth Failing leadership Recession in the economy Vast oversupply of capacity An unconcerned and malfunctioning Board of Directors

 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)

 Board of Directors

12 Directors agreed to pay (out of pocket) a total of $25M to settle securities class action case
Investment Bankers

Settlement of securities class action case with banks: Citi Group $2.6B JP Morgan $2.0B Other $0.9B

SEC Action: Grubman an Soloman Brothers Securities Analyst fined $15M and banned for life from practice.

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 settle securities class action case

 Independent Auditor Arthur Andersen agreed to pay $65M to settle securities class action case

Insurance Companies Agreed to pay $36M to settle claims against WorldCom directors and officers

 17,000 jobs cut to save $1 billion. WorldCom may write off $50.6 billion in intangible assets. Added additional board members to serve on a special investigative 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

 As WorldCom acquired new companies, its accounting procedures, computer systems, and customer service issues became increasingly more complex, and industry experts note that WorldCom struggled to keep up with the growth. Company employees who tried to bring initial problems to Ebberss attention were discouraged, and Ebbers made it clear he only wanted to hear good news.

This avoidance of problems created a company culture that demanded success at all costs. That ultimately included falsifying financial reports.
Increase customer base Increase tariff charges to increase revenue Decrease the cost

 Unethical things happening in WorldCom were : Wrong accounting Procedure Auditors did not point out accounting lapses Co. executive were asked to look after properties of acquired co.s rather than integrating Losses were shown as capital Expenditure They were running two billing programmes simultaneously because of this their receivables increased Their focus was more on Acquisition then integration If they had adopted Clear business strategy they might have not faced this situation of winding up co. instead they might have been leading market co. in telecom industry .