WORLDCOM

Accounting Fraud

History of WorldCom
WorldCom

founded in 1983 in Hattiesburg. Initially called LDDS-Long Distance

Discount Service.

1996: Acquired MFS (Metropolitan Fiber Systems)Communications (internet

backbone)
MCI merger with LDDS(The largest merger in the US history because LDDS and
MCI Communication announced their $37 billion merger to form MCI WorldCom.

Almost 75 mergers and acquisitions of other small companies

It has its operations running in more than 65 countries
On 21 July 2002 the second largest telecommunications company in the U.S.

Services
It provides data transmission ,internet services
for long distance businesses and various other
phone services for a cheaper price than
competitors.
They are handling 50 percent of all United
States Internet traffic and 50 percent of all emails worldwide.

What Happened?
In 1999 WorldCom attempt to buy Sprint worth
$129 billion but Anti-trust regulations wouldnt
allow Sprint acquisition in this way attempted
amount crashed that impact declined in Stock
price of WorldCom in 2000.

So WorldCom has reduced reserve accounts

held to cover liabilities of acquired companies.

Fraud
Fraud was accomplished in two main ways:
Firstly, WorldCom's accounting
underreported 'line costs' (expenses
telecommunication companies) by
these costs on the balance sheet
properly expensing them.

department
with other
capitalizing
rather than

Secondly, the company inflated revenues with

bogus accounting entries from corporate
unallocated revenue accounts

What WorldCom did?

Reduced the amount of money held in reserve by
$2.8 billion and moved this money into the
revenue line of its financial statements.
In 2000, classified operating expenses as longterm capital investments ( $3.85 billion).
These changes turned WorldCom's losses into
profits. It also made WorldCom's assets appear
more valuable.

HOW WAS DISCOVER?

The first discovery of illegal activity was by
WorldCom's own internal audit department who
uncovered $3.8 b. of the fraud in June 2002. The
company's audit committee and board of directors were
notified of the fraud.
The Securities and Exchange Commission (SEC)
launched an investigation. By the end of 2003, it was
estimated that the company's total assets had been
inflated by around $11 billion.

Impact and Penalties

Impact
$ 180b of shareholder value lost

$37.5b of debt and preferred stock

value lost
57,000 employees lost there job
local employees retirement funds
amount $300 m lost

Penalties
On March 15, 2005 Bernard Ebbers
(CEO) was found guilty of all charges
and convicted on fraud, conspiracy and
filing false documents with regulators.
He was sentenced to 25 years in prison

Suggestion
periodic surprise audits should be

Trust, but Verify

Unethical Work Culture should be control

employees should not be Pressurise to manipulate accounts