WORLDCOM

CASE PRESENTATION

OVERVIEW OF WORLDCOM
WORLDCOM WAS SIGNIFICANT PLAYER IN WALL STREET AND THE TELECOM INDUSTRY IN 90S
TOOK THE TELECOM INDUSTRY BY STORM.
GREW RAPIDLY FROM ACQUISITIONS AND DEMAND IN THE TELECOM INDUSTRY.
WAS THE SECOND LARGEST LONG DISTANCE CARRIER
IT BECAME A CASUALTY OF THE DOT COM BUBBLE
IN ORDER TO REMAIN PROFITABLE AND SHOW HIGH GROWTH RESORTED TO ACCOUNTING
FRAUD
BECAME BANKRUPT

KEY EVENTS
1996: ACQUIRED MFS
1998: ACQUIRED MCI (MORE THAN TWICE ITS SIZE)
2000: FAILED MERGER WITH SPRINT (WOULD HAVE BEEN THE LARGEST MERGER
IN HISTORY)
2000: DOTCOM BUBBLE BURST (RAPID DECLINE IN TELECOM STOCK VALUES)
2000-02: WORLDCOM LOANS $400M TO CEO (EBBERS)
2002: ACCOUNTING FRAUD UNCOVERED
2002: FILED FOR BANKRUPTCY PROTECTION
2004: EMERGED FROM BANKRUPTCY AS MCI
2005: VERIZON AGREES TO ACQUIRE THE COMPANY FOR $6.75B

SITUATION BACKGROUND
IN 2000, DOT COM BUBBLE CAME INTO THE MARKET
AS A RESULT, REVENUE GROWTH SLOWED
STOCK PRICES STARTED FALLING
EXPENSES AS A PERCENTAGE TO ITS TOTAL REVENUE INCREASED
EARNINGS WONT MATCH WALL STREET ANALYSTS EXPECTATIONS

WHAT WORLDCOM DID ?

REDUCED THE AMOUNT OF MONEY IT HAD IN RESERVES BY 2.8 BILLION AND
MOVED THIS MONEY INTO REVENUE LINE.
CLASSIFIED OPERATING EXPENSES AS LONG TEM INVESTMENTS
ADDED JOURNAL ENTRY FOR 500 MILLION IN COMPUTER EXPENSES
SHIFTED EXPENDITURES FROM INCOME STATEMENT TO BALANCE SHEET
THESE CHANGES TURNED LOSSES INTO PROFITS FOR WORLDCOM

COMPLETE PICTURE OF FRAUD

$11 BILLION ACCOUNTING FRAUD OVER 3 YEAR PERIOD (1999 - 2002)
ACCOUNTING FRAUD OCCURRED IN TWO MAIN FORMS:
UNDERSTATEMENT OF OPERATING EXPENSES OF $7B THROUGH IMPROPER
RELEASE OF ACCRUALS
THROUGH IMPROPER CAPITALIZATION OF OPERATING EXPENSES
OVERSTATEMENT OF REVENUES OF $1B.

HOW IT WAS DISCOVERED

TIPS WERE SENT TO INTERNAL AUDIT TEAM
ACCOUNTING IRREGULARITIES WERE SPOTTED
SUSPICION AS THE COMPETITORS WERE INCURRING LOSSES
CYNTHIA COOPER LED THE INTERNAL AUDIT TEAM DESPITE THE WARNING
FROM CFO

IMPACT OF THE FRAUD

$180BILLION SHAREHOLDER VALUE LOST
COMPANY PAID $750M TO SEC
57000 EMPLOYEE JOBS LOST
EXECUTIVES AND ACCOUNTING STAFF
INDIVIDUALS CONVICTED OF FRAUD / CONSPIRACY / FALSE FILINGS
EBBERS CEO
SULLIVAN CFO
MYERS CONTROLLER
YATES DIR OF ACCTG
VINSON ACCTG DEPT
MANAGER
NORMAND ACCTG DEPT
MANAGER

25 YEARS IN PRISON
5 YEARS IN PRISON
1 YEAR IN PRISON
1 YEAR IN PRISON
5 MONTHS IN PRISON
5 MONTHS HOUSE ARREST
3 YEARS PROBATION

CAUSES
WEAK CORPORATE CULTURE
WORLDCOM WAS DOMINATED BY EBBERS AND SULLIVAN, WITH VIRTUALLY NO CHECKS AND
CONSTRAINTS PLACED ON THEIR ACTIONS
SIGNIFICANT PRESSURE TO MEET THE NUMBERS
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
INADEQUATE AUDITS BY INDEPENDENT AUDITORS

ETHICAL VALUES VIOLATED

UNETHICAL WORK CULTURE

EMPLOYEES WHO PLAYED ALONG WERE REWARDED

FUDGED UP THE ACCOUNTS; MISLEAD THE VARIOUS STAKEHOLDERS.

RECOMMENDATIONS
ENHANCE CODE OF CORPORATE GOVERNANCE
IMPLEMENT WHISTLE BLOWING POLICY
CONDUCT PROACTIVE AUDITING
ENHANCE THE COMMUNICATION

THANK YOU