Accounting Fraud at WorldCom

By,Sriram.R

Overview
WorldCom Inc. began as a small
Mississippi provider of long
distance telephone service called LDDS.
1996: Acquired MFS Communications (internet
backbone)
1998: Acquired MCI
2000: Failed merger with Sprint
2000: Dotcom Bubble Burst (rapid decline in
telecom stock values)
2002: Accounting Fraud uncovered
2002: Filed for Bankruptcy Protection

The Key Players

Source: google

What Happened?

From 1998-2000, WorldCom reduced reserve accounts

held to cover liabilities of acquired companies

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 to the tune of $3.85 billion.
Huge losses turned into enormous profits.

WorldCom added $2.8 billion to the revenue line from

these reserves

$1.38 billion in net income in 2001

Inflated the companys value in its assets

Scandal

The whistleblower sent

tips to the internal audit
team
Accounting
irregularities were
spotted in MCI's books.
The SEC was suspicious
because while
WorldCom was making
so much
profit,AT&Twas losing
money.

Capital expenditures as well as the

$500 million in undocumented
computer expenses.

Another $2 billion in questionable

entries

Admitted to inflating its profits by $3.8

billion over the previous five quarters.

Why it Happened?

Corporate Culture
Autocratic style of management and followed a top down
approach.

Ebbers was obsessed with revenue growth and insisted on

a 42% E/R ratio.
Lack of courage of employees to communicate the
fraudulent activates believed it would have cost them
their jobs
A financial system in which controls were extremely
deficient
The BOD and Audit Committee did not appear to have had
an adequate understanding of the company and culture
Inadequate audits by independent auditors

Impact of Fraud

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EFFECT

Telecommunication Market dropped:

After WorldCom scandal the telecommunication

Market dropped 7% decreased in 2002.

Effect on share price of other companies:

The share price of Nokia,

Sony Ericsson, Vodafone
and other telecommunication
Companies declined.

Growth Rate of Stock Market:

Stock price was at a peak of $64.5 in 1999,after this scandal the

stock price fell to $0.83 by July 21,2002.

Key Take Aways

9

History repeats itself.

Be aware of your environment.
If it seems too good to be
true, it probably is.
No job is worth breaking the law
or committing unethical acts for.
Your personal integrity is your most
important asset you own it and
control it.
Trust, but Verify.

THE END