By: Barrett Smith

WORLDCOM FRAUD

BACKGROUND

• Second largest Telecom company in 2002 (behind AT&T)

• Made up of WorldCom Group and MCI

• Sells voice, data, and internet backbone services to gov, businesses, and consumers

• Telecom Industry was declining from 1998 - 2002

BERNIE EBBERS• CEO from 1985 to April 2002

• Built company from small Mississippi business to Telecom giant

• Pushed for corporate loans to cover slipping margins

• Ousted as CEO before fraud was uncovered

THE FRAUD• Admitted to accounting fraud in June 2002

• Arthur Anderson was auditor

• Estimated $11 billion in accounting errors

• Led to $3.8 billion inflated profits over a 5 quarter period

HOW IT WAS DONE

• Ongoing operating costs reclassified as capital improvements

• Spread costs over several years through depreciation

• Led to extremely overstated cash flows and profits

• Line costs stayed a consistent percentage of revenues

• Capital expenses decreased 15% over the 5 quarters

• Right on target from 2000 forecast

• Maintenance labor costs were most likely changed to tweak books

UNCOVERING THE FRAUD• Employees testified in June 2001 that the company was having problems and that

they were concerned of the company going forward

• These original tips were ignored

• Internal auditors caught the fraud in June 2002 which lead to the confession of:

• CEO – Bernie Ebbers

• CFO – Scott Sulivan

• Controller – David Meyers

• Director of General Accounting – Buford Yates

THE EFFECTS• Largest Chapter 11 Bankruptcy Filing in US History – July 21, 2002

• 17,000 jobs cut

• CFO, Controller, Directory of Accy, and several other internal auditors fired

• Arthur Anderson fined millions

• CEO Bernie Ebbers started 25 year prison sentence in 2006

• $366 Million in debt…

PREVENTION

• Real-time bookkeeping controls

• Require review of revision to entries before they are actaully made

• Changes to entries exceeding cumulative thresholds internal auditors

• Email analytics

• One person made all the fraudulent entries

• Track conversations

• Could have been discovered before so much damage was done

SOURCES• http://voices.yahoo.com/worldcom-scandal-look-back-one-biggest-225686.html

• http://www.worldcomfraudinfocenter.com/

• http://www.time.com/time/business/article/0,8599,266287,00.html

• http://www.forbes.com/2002/07/08/0708simons.html