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    Case Study: Worldcom: Worldcom Took The Telecom Industry by Storm When It Began A Frenzy of

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    Brizza Angela Herbese
    WorldCom grew rapidly in the 1990s through acquisitions, but struggled to meet earnings expectations in 1999. To inflate profits, WorldCom's CFO fraudulently reclassified $3.85 billion in operating expenses as capital expenditures between 2000-2001. An internal audit uncovered the accounting irregularities after tips to auditors. WorldCom admitted to overstating profits by $3.8 billion and filed for bankruptcy shortly after. Former CEO Bernie Ebbers was convicted of fraud and sentenced to 25 years in prison for his role in the scandal.

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    Case Study: Worldcom: Worldcom Took The Telecom Industry by Storm When It Began A Frenzy of

    Uploaded by

    Brizza Angela Herbese
    74 views2 pages
    WorldCom grew rapidly in the 1990s through acquisitions, but struggled to meet earnings expectations in 1999. To inflate profits, WorldCom's CFO fraudulently reclassified $3.85 billion in operating expenses as capital expenditures between 2000-2001. An internal audit uncovered the accounting irregularities after tips to auditors. WorldCom admitted to overstating profits by $3.8 billion and filed for bankruptcy shortly after. Former CEO Bernie Ebbers was convicted of fraud and sentenced to 25 years in prison for his role in the scandal.

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    WorldCom grew rapidly in the 1990s through acquisitions, but struggled to meet earnings expectations in 1999. To inflate profits, WorldCom's CFO fraudulently reclassified $3.85 billion in operating expenses as capital expenditures between 2000-2001. An internal audit uncovered the accounting irregularities after tips to auditors. WorldCom admitted to overstating profits by $3.8 billion and filed for bankruptcy shortly after. Former CEO Bernie Ebbers was convicted of fraud and sentenced to 25 years in prison for his role in the scandal.

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    © All Rights Reserved
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    74 views2 pages

    Case Study: Worldcom: Worldcom Took The Telecom Industry by Storm When It Began A Frenzy of

    Uploaded by

    Brizza Angela Herbese
    WorldCom grew rapidly in the 1990s through acquisitions, but struggled to meet earnings expectations in 1999. To inflate profits, WorldCom's CFO fraudulently reclassified $3.85 billion in operating expenses as capital expenditures between 2000-2001. An internal audit uncovered the accounting irregularities after tips to auditors. WorldCom admitted to overstating profits by $3.8 billion and filed for bankruptcy shortly after. Former CEO Bernie Ebbers was convicted of fraud and sentenced to 25 years in prison for his role in the scandal.

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    Case Study: WorldCom

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    WorldCom took the telecom industry by storm when it began a frenzy of
    acquisitions in the 1990s. The low margins that the industry was
    accustomed to weren't enough for Bernie Ebbers, CEO of WorldCom. From
    1995 until 2000, WorldCom purchased over sixty other telecom firms. In
    1997 it bought MCI for $37 billion. WorldCom moved into Internet and data
    communications, handling 50 percent of all United States Internet traffic
    and 50 percent of all e-mails worldwide. By 2001, WorldCom owned one-
    third of all data cables in the United States. In addition, they were the
    second-largest long distance carrier in 1998 and 2002.

    How the Fraud Happened


    So what happened? In 1999, revenue growth slowed and the stock price
    began falling. WorldCom's expenses as a percentage of its total revenue
    increased because the growth rate of its earnings dropped. This also meant
    WorldCom's earnings might not meet Wall Street analysts' expectations. In
    an effort to increase revenue, WorldCom reduced the amount of money it
    held in reserve (to cover liabilities for the companies it had acquired) by
    $2.8 billion and moved this money into the revenue line of its financial
    statements.
    That wasn't enough to boost the earnings that Ebbers wanted. In 2000,
    WorldCom began classifying operating expenses as long-term capital
    investments. Hiding these expenses in this way gave them another $3.85
    billion. These newly classified assets were expenses that WorldCom paid
    to lease phone network lines from other companies to access their
    networks. They also added a journal entry for $500 million in computer
    expenses, but supporting documents for the expenses were never found.
    These changes turned WorldCom's losses into profits to the tune of $1.38
    billion in 2001. It also made WorldCom's assets appear more valuable.

    How it Was Discovered


    After tips were sent to the internal audit team and accounting irregularities
    were spotted in MCI's books, the SEC requested that WorldCom provide
    more information. The SEC was suspicious because while WorldCom was
    making so much profit, AT&T (another telecom giant) was losing money.
    An internal audit turned up the billions WorldCom had announced as capital
    expenditures as well as the $500 million in undocumented computer
    expenses. There was also another $2 billion in questionable entries.
    WorldCom's audit committee was asked for documents supporting capital
    expenditures, but it could not produce them. The controller admitted to the
    internal auditors that they weren't following accounting standards.
    WorldCom then admitted to inflating its profits by $3.8 billion over the
    previous five quarters. A little over a month after the internal audit began,
    WorldCom filed for bankruptcy.

    Where Are They Now?


    When it emerged from bankruptcy in 2004, WorldCom was renamed MCI.
    Former CEO Bernie Ebbers and former CFO Scott Sullivan were charged
    with fraud and violating securities laws. Ebbers was found guilty on all
    counts in March 2005 and sentenced to 25 years in prison, but is free on
    appeal. Sullivan pleaded guilty and took the stand against Ebbers in
    exchange for a more lenient sentence of five years.

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