Download - Accounting scandal of worldcom
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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