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The Accounting Scandal of WorldCom

The World’s Largest Accounting Fraud

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WorldCom’s Background

Awoke the sleeping giant by leading the telecom industry into profitability in the 90’s.

During the 1990’s, WorldCom was deeply involved in acquisitions and completed several “mega-deals”

Purchased over 60 firms in 2nd half of the 90’s

By 2001 owned a third of the US data cables

Nature of Accounting Fraud

The fraud was accomplished primarily in two ways:

Under reporting ‘line costs’ (interconnection expenses with other telecommunication companies) by capitalizing  these costs on the balance sheet rather than properly expensing  them.

Inflating revenues with bogus accounting entries from "corporate unallocated revenue accounts".

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How It Happened

WorldCom EnvironmentSubstantial Problems with the Company’s Internal Controls

WorldCom was dominated by Ebbers and Sullivan, with virtually no checks and constraints placed on their actions

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

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Impact of the Fraud

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

Employees57,000 employees lost jobsAll current and former employees lost most of their

retirement savings (invested in WorldCom stock)

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Impact of the Fraud

Names Designation Punishment

Ebbers CEO 25 yrs prison

Sullivan CFO 5 yrs prison

Myers controller 1 yrs prison

Yates Director of acc dept

1 yrs in prison

Vinson Accounting dept manager

5 months house arrest

Normand Accounting dept manager

3 yrs probation

Impact on the Financial World

Overall investor distrust with companies undergoing similar problems.

National feeling that the stock market is not as safe as previously thought.

SEC forced to keep a closer look on auditor and accountant dealings