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Worldcom Case

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In summer 2002 WorldCom, the fastest rising company in the US history with its CEO of 17 years Bernard Ebbers was busted for fraudulent financial activities (American Greed, 2008).
The history of the company dates back to 1983 when Long Distance Discount Services (LDDS) was founded. The company was providing long distance calling for cheap by doing acquisitions and buying smaller phone companies (American Greed, 2008). Bernard Ebbers was company’s CEO and within 10 years he was able to make LDDS into the largest telecom company with a revenue of US 6 billion (American Greed, 2008). In 1998, Ebbers performed the biggest merger by buying out MCI. Company’s name was changed to WorldCom to reflect its size and capacity. In 1999 WorldCom’s performance was at its highest peak, with its stock at US 68 per share (American Greed, 2008). Ebber’s main strategies as CEO of WorldCom were: aggressive acquisitions; and cost control by “hammering off pennies” (American Greed, 2008).
Even though Ebbers was cutting costs at WorlCom by refusing to provide free coffee to his employees, he was splurging extensively. In the late 90’s, Ebbers bought a percent of hockey team, not only he owned several yachts but he also bought yachts building company, he purchased a biggest ranch in the US, timberland, crawfish company, golf course, etc. Money for these purchases came from Ebbers’ personal loans from JPMorgan and Citi bank and totaled US 408 million. Ebbers secured the loans with WorldCom stock (American Greed, 2008).
In the early 2000, long distance service was going down. WorldCom’s stock went from US 68 per share in 1999 to US 18 per share in 2000. Due to the drastic decrease in stock, Ebbers was approached by the banks regarding his loans. As a result, WorldCom’s Board approved the loan to Ebbers for US 408 million to repay the banks, which raised SEC interest in the company and the bailout. In April 29, 2002 the Board asked Bernard Ebbers to resign (American Greed, 2008).
Cynthia Cooper and Glenn Smith were internal auditors at WorldCom and were able to uncover and identify US 3.8 billion fraud within the company. The auditors discovered that company’s leases for phone lines were booked as capital expense and revenue was inflated with fake entries which made the company to appear much “healthier” than it was (Cooper, 2008).
According to Cooper, in the 3rd quarter of 2000, line cost expense (the largest single expense item on Income Statement) had increased dramatically and was out of line with revenue (Cooper, 2008). Later it was discovered that WorldCom’s CFO, Scott Sullivan, told accounting managers to find some excess liability account to reduce the expense so that line cost percentage of revenue stayed at 42% consistent with prior quarters (Katz & Homer, 2008). During the audit of capital expenditures two schedules were given that did not agree; there was no explanation provided as to why. In prepaid capacity, amount had been moved from Income Statement to Balance Sheet without any supporting documents. David Myers, the controller, admitted that there was no support for the entries and that once they had done it the first time, it was difficult to stop (Katz & Homer, 2008). All these fake entries inflated assets by as much as US 11 billion.
In June 2002, WorldCom announced its bankruptcy which led to 30,000 lost jobs, US 180 billion in investor’s losses and Federal criminal charges placed against top level executives (American Greed, 2008).
During the trial process, a “blame game” was played. Reid Weinfarten, Ebbers’ defense attorney was trying to draw a picture of Ebbers being a victim in the whole situation, an innocent person (nbcnews.com). The attorney insisted that Ebbers knew nothing about accounting department’s “distorted picture of corporate corruption” and was trying to portray Ebbers as compassionate, charitable person (nbcnews.com). On the other hand Scott Sullivan, former CFO, said that he and Ebbers discussed ways to inflate the numbers, that he was pressured into increasing profit and making the adjustments over the years (Andelman, 2005). The final verdict was that Ebbers was guilty of conspiracy and securities fraud and sentenced to 25 years in Federal prison.
As a result, following WorldCom scandal and the whole telecom bubble burst, Congress passed Sarbanes-Oxley Act introducing a new set of extensive business standards and regulations (Katz & Homer, 2008).

Works Cited:

American Greed: Inside the WorldCom Scam. Season 2 Episode 12 (2008). Hulu. Retrieved May 25, 2014, from http://www.hulu.com/watch/46554/american-greed-inside-the-worldcom-scam

Cooper, C. (2008, March 13). Book Discussion on Extraordinary Circumstances. . Retrieved May 25, 2014, from http://www.c-spanvideo.org/program/201829-1

Ebbers’ attorney to appeal. (2005, July 13). NBCNews.com. Retrieved May 25, 2014, from http://video.msnbc.msn.com/cnbc/8562915#8562915

Katz, D., & Homer, J. (2008, February 1). WorldCom Whistle-blower Cynthia Cooper. . Retrieved May 25, 2014, from http://www.cfo.com/article.cfm/10590507/c_10598910

Andelman, D. (2005, August 12). Scott Sullivan Gets Slap on the Wrist: WorldCom Rat Race DAVID A. ANDELMAN / Commentary / Forbes 12aug2005. Scott Sullivan Gets Slap on the Wrist: WorldCom Rat Race DAVID A. ANDELMAN / Commentary / Forbes 12aug2005. Retrieved May 25, 2014, from http://www.mindfully.org/Industry/2005/Sullivan-WorldCom-Rat12aug05.htm

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