Worldcom Scandal
WorldCom Scandal Formerly known as WorldCom, now known as MCI, this U. S. -based telecommunications company was at one time the second-largest long distance phone company in the U. S. Today, it is perhaps best known for a massive accounting scandal that led to the company filing for bankruptcy protection in 2002. In 1998, the telecommunications industry began to slow down and WorldCom’s stock was declining.
CEO Bernard Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses endeavors. The company’s profitability took another hit when it was forced to abandon its proposed merger with Sprint in late 2000. During 2001, Ebbers persuaded WorldCom’s board of directors to provide him corporate loans and guarantees totaling more than $400 million. Ebbers wanted to cover the margin calls, but this strategy ultimately failed and Ebbers was ousted as CEO in April 2002.
Beginning in 1999 and continuing through May 2002, WorldCom, under the direction of Scott Sullivan (Chief Financial Officer), David Myers (Senior Vice President and Controller) and Buford Yates (Director of General Accounting), used shady accounting methods to mask its declining financial condition by falsely professing financial growth and profitability to increase the price of WorldCom’s stock. The fraud was done in two main ways.
First, WorldCom’s accounting department underreported “line costs”, which are interconnection expenses with other telecommunication companies, by capitalizing these costs on the balance sheet rather than properly expensing them. Second, the company inflated revenues with bogus accounting entries from “corporate unallocated revenue accounts”. The first discovery of possible illegal activity was by WorldCom’s own internal audit department who uncovered approximately $3. 8 billion of the fraud in June 2002. WorldCom said it will restate its financial results for all of 2001 and the first quarter of 2002 to take almost $3. billion in cash flow off its books, wiping out all profit during those times. The company’s shares, among the most heavily traded on Wall Street, fell as much as 76 percent in after-hours action following the announcement and at one point were trading at 20 cents each. These transfers were apparently discovered by Cynthia Cooper, WorldCom’s vice president – internal audit. When informed about what happened, both the company’s current auditor, KPMG, and its former auditor, Andersen, agreed that these transfers were not in accordance with generally accepted accounting principles (GAAP).
Following a review by the company’s audit committee, WorldCom’s board terminated Sullivan and accepted the resignation of David F. Myers, senior vice president and controller. The SEC suit came a day later. On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection, the largest such filing in United States history. The company emerged from Chapter 11 bankruptcy in 2004 with about $5. 7 billion in debt. At last count, WorldCom has yet to pay its creditors On March 15, 2005 Bernard Ebbers 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. Other former WorldCom officials charged with criminal penalties in relation to the company’s financial misstatements. Sources: (2007, January 31). MCI Inc. Retrieved February 17, 2007 from Wikimedia Foundation, Inc. Web site: http://en. wikipedia. org/wiki/Worldcom (2005, July 13). WorldCom’s ex-boss gets 25 years. Retrieved February 17, 2007 from British Broadcasting Corporation Web site: http://news. bbc. co. uk/1/hi/business/4680221. stm http://www. cbsnews. com/2100-201_162-513473. html
