The story of WorldCom began in 1983 when businessmen Murray Waldron and William Rector sketched

out a plan to create a long-distance telephone service provider on a napkin in a coffee shop in Hattiesburg,
Miss. Their new company, Long Distance Discount Service (LDDS), began operating as a long distance
reseller in 1984. Early investor Bernard Ebbers was named CEO the following year. Through acquisitions
and mergers, LDDS grew quickly over the next 15 years. The company changed its name to WorldCom,
achieved a worldwide presence, acquired telecommunications giant MCI, and eventually expanded
beyond long distance service to offer the whole range of telecommunications services. WorldCom became
the second-largest long-distance telephone company in America, and the firm seemed poised to become
one of the largest telecommunications corporations in the world. Instead, it became the largest
bankruptcy filing in U.S. history at the time and another name on a long list of those disgraced by the
accounting scandals of the early 21st century.

From its humble beginnings as an obscure long distance telephone company WorldCom, through the
execution of an aggressive acquisition strategy, evolved into the second-largest long distance telephone
company in the United States and one of the largest companies handling worldwide Internet data traffic.
According to the WorldCom Web site, at its high point, the company

Provided mission-critical communications services for tens of thousands of businesses around the
world
Carried more international voice traffic than any other company
Carried a significant amount of the world's Internet traffic
Owned and operated a global IP (Internet Protocol) backbone that provided connectivity in more
than 2,600 cities and in more than 100 countries
Owned and operated 75 data centers on five continents. Data centers provide hosting and
allocation services to businesses for their mission-critical business computer applications

WorldCom achieved its position as a significant player in the telecommunications industry through the
successful completion of 65 acquisitions. Between 1991 and 1997, WorldCom spent almost $60 billion in
the acquisition of many of these companies and accumulated $41 billion in debt. Two of these acquisitions
were particularly significant. The MFS Communications acquisition enabled WorldCom to obtain UUNet,
a major supplier of Internet services to business, and MCI Communications gave WorldCom one of the
largest providers of business and consumer telephone service. Through what appeared to be a prescient
and successful business strategy at the height of the Internet boom, WorldCom became a darling of Wall
Street. In the heady days of the technology bubble Wall Street took notice of WorldCom and its then
visionary CEO, Bernie Ebbers. This was a company "on the move," and Wall Street investment banks,
analysts and brokers began to discover WorldCom's value and make "strong buy recommendations" to
investors.

As this process began to unfold, the analysts' recommendations, coupled with the continued rise of the
stock market, made WorldCom stock desirable, and the market's view of the stock was that it could only
go up. As the stock value went up, it was easier for WorldCom to use stock as the vehicle to continue to
purchase additional companies. The acquisition of MFS Communications and MCI Communications were,
perhaps, the most significant in the long list of WorldCom acquisitions. With the acquisition of MFS
Communications and its UUNet unit, "WorldCom suddenly had an investment story to offer about the
value of combining long distance, local service and data communications."
The companys problems started with the dot-com bubble burst and following reduced demand on
infrastructure when it had the vast oversupply in telecommunications capacity. The revenue has fallen
while debt taken on to finance mergers and infrastructure investment remains. Ultimately, the market
value of the companys common stock plunged from about $150 billion in January 2000 to less than $150
million as of July 1st 2002. Overall, more than $9 billion in false or unsupported accounting entries were
made in WorldComs financial systems in order to achieve desired reported financial results.

As we know, managers like to manipulate earnings to achieve a variety of objectives, such as income
smoothing, long-term bonus maximization, and avoidance of declines or losses in earnings to meet Wall
Street expectations and boost its stock price. WorldCom is one of such examples. From the second quarter
of 1999 through the first quarter of 2002, it improperly reduced its reported line costs (and increased pre-
tax income) over $7 billion totally.

Why corporate management engages in earnings manipulation? In our opinions, there are three main
reasons.

Management had a desire to conceal its poor performance. The fact is that in 1999, the company spent
billions on expanding its systems and had incurred costs, but revenues did not grown thereafter.

They paid too much attention to Wall Street to meet its expectations to maintain high stock value, which
in return worked like a currency for acquisitions.

Thirdly, management had generous stock options and would like to boost their compensations.

WorldCom stock had fallen from a high of $64.50 a share in mid-1999 to less than $1 a share. While much
and perhaps most of this decline might be attributed to the firms changing economic prospects, the
accounting maneuver described above is likely to have hurt investors who continued to hold the shares
or even bought more in anticipation of a rebound.

WorldCom employees who hold the companys stock in their retirement plans have also suffered losses.
At the end of 2000, about 32%, or $642.3 million, of WorldCom retirement funds were in company stock;
those investment have fallen to less than 4%, or less than $18.7 million, of the funds. WorldCom does not
require employees to own company stock in their retirement plans, and they are permitted to sell the
shares they do have.
WorldCom filed for Chapter 11 bankruptcy protection on July 21st, 2002 (The goal of a Chapter 11
bankruptcy is to keep the firm in business under a court-supervised rehabilitation plan.) While the
company reported $103.8 billion in assets as of the end of March 2002, it also has $41 billion in debt on
which it must make payments. The WorldCom bankruptcy is the largest in U.S. history. One factor affecting
WorldComs future is whether its customers switch to other telecommunications carriers. On July 1st, the
Bush Administration announced that it was considering disqualifying WorldCom from further federal
government contracts. (The Federal Aviation Administration has rejected WorldComs bid to modernize
its communications systems.) How bankruptcy would affect service to customers retaining WorldCom
contracts is an issue the Federal Communications Commission is monitoring.

After the June 25th announcement, WorldCom stated that it would cut 17,000 of its 85,000 employees.

July 29th, WorldCom named a new chief financial officer (John S. Dubel) and a chief restructuring officer
(Gregory F. Rayburn). A committee was named to represent the companys creditors.

The Nasdaq stock market announced that it would delist WorldCom stock.

August 1st, Federal prosecutors charged Scott D. Sullivan (the former chief financial officer) and David F.
Myers (the former controller) with securities fraud, conspiracy, and filing false statements with the SEC.

Conclusion

With all the above factors put into perspective, there are clear indications that WorldComs
organizational behavior, leadership, management practices, corporate governance, and organizational
structure have all contributed to the companys failure. In addition, the constant fraudulent practices
and improper conduct should have, without doubt, raised concern among stakeholders and auditors,
both internal and external. The officers unethical conduct and attempts of cover-ups were clear
indications of serious issues at the organizations core, which

with the proper installment of corporate governance and policies would have been uncovered and
avoided all together.