International Finance and Forex Management

Assignment 5

Anika Mary Varkey

PGDM 15|ASB
Roll No: 18
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WORLDCOM SCANDAL
WorldCom which was at one time the second-largest telecommunication
company in the U.S is perhaps best known for a massive accounting scandal that led
to the company filing for bankruptcy protection in 2002. WorldCom executives
effectively fudged the company's accounting numbers, inflating the company's assets by
around $12.8 billion dollars. The swift bankruptcy that followed led to massive losses
not only for investors but also for retailers and employees. The WorldCom scandal
is regarded as one of the worst corporate crimes in history, and several
former executives involved in the fraud were held responsible for their
involvement. WorldCom inflated assets by as much as $11-12.8 billion, leading to
30,000 lost jobs and $180 billion in losses for investors. Investors in WorldCom
have suffered major losses: the market value of the companys common
stock plunged from about $150 billion in January 2000 to less than $150
million as of July 1, 2002.
WorldCom was a provider of long distance phone services to businesses and residents. It
started as a small company known as Long Distance Discount Services (LDDS) that
grew to become the third largest telecommunications company in the United States due
to the management of Chief Executive Officer

Bernie Ebbers. It consisted of an

employee base of 85,000 workers at its peak with a presence in more than 65 countries.
LDDS started in 1983. In 1985, Ebbers was recruited as an early investor of the company
and became its CEO. It went public four years later. Ebbers helped grow the small
investment into a $30 billion revenue producing company characterized by sixty
acquisitions of other telecomm businesses in less than a decade. On June 25, 2002, the
company revealed that it had been involved in fraudulent reporting of its numbers by
stating a $3 billion profit when in fact it was a half-a-billion dollar loss. After an
investigation was conducted, a total of $11 billion in misstatements was revealed.
On June 25, 2002, WorldCom announced that it intended to restate its financial
statements for 2001 and the first quarter of 2002. It stated that it had determined that
certain transfers totaling $3.852 billion during that period from line cost

expenses (costs of transmitting calls) to asset accounts were not made in accordance
with generally accepted accounting principles (GAAP).
Less than one month later, WorldCom and substantially all of its active U.S.
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the
Bankruptcy Code. WorldCom subsequently announced that it had discovered
an additional $3.831 billion in improperly reported earnings before taxes for 1999,
2000, 2001 and first quarter 2002. It has also written off approximately $80 billion of
the stated book value of the assets on the Companys balance sheet at the time the fraud
was announced.On June 26, 2002, the United States Securities and Exchange
Commission filed a lawsuit captioned Securities and Exchange Commission v.
WorldCom, Inc., No. 02-CV-4963 (JSR).
On July 3, the Honorable Jed S. Rakoff, of the United States District Court for the
Southern District of New York, appointed Richard C. Breeden, former Chairman of
the SEC, as Corporate Monitor, with the consent of WorldCom. This Committee was
established by the Board of Directors

On July 21, 2002. The Board directed to

conduct a full and independent investigation of the accounting irregularities that gave
rise to the announced intention to restate, and such other matters as we concluded
should be considered, without any limitations. The members of the Committee were
new to the Board of WorldCom at that time.

Key Players Involved in WorldCom Scandal

1. Bernard Ebbers-Chief Executive Officer in the company.
2. Scott Sullivan-The chief financial officer and secretary of WorldCom.
3. David Myers-The controller and senior vice president of WorldCom.
4. Cynthia Cooper-Chief Internal Auditor of WorldCom.
5. Buford Buddy Yates He was the former director of accounting at WorldCom.
6. Betty Vinson She was the former director of corporate accounting at
WorldCom.
7. Arthur Anderson LLP Kenneth M. Avery and Melvin Dick were the primary
auditors representing their firm in the WorldCom scandal.
External Auditors
The external auditor, Arthur Andersen, was the one responsible for providing an
independent opinion of the financial situation at WorldCom for investors and creditors.
The auditing firm also failed to carry out its duties properly.
Arthur Andersens failed to detect the fraud was due in part to negligence and in part to
the tight control top management kept over information.
Andersen failed to bring this problem to the attention of the Audit Committee.
Effects on Internal Environment
After the fraud was announced to the public on June 25, 2002, new measures were
taken quickly to reform WorldCom and restore the publics confidence in the company.
The entire Board of Directors was replaced with a new Board to guarantee independence
and objectivity about managements decision. While more than four hundred new
finance and accounting personnel were hired, 17,000 of the existing 85,000 employees
at WorldCom were let go. A new independent auditor was 40 brought in to re-audit the
financial statements for the fraudulent period. The overstated assets were evaluated for
impairment and the goodwill from the previous acquisitions was written down. The use
of stock options was also abolished and restricted stock with full expensing value of
equity grants was implemented A new ethics program was implemented with training
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programs for employees to educate them on the manner of their responsibility at the
company and on the accounting issues that may signal an irregularity. The largest effect
on the external environment was on the investors of WorldCom. The New York State
Common Retirement Fund is the second largest public pension fund in the U.S. It
invested the assets of the New York state and local employees retirement system and of
the New York State and Local Police and Fire retirement system. The pension fund lost
over $300 million of its investments in WorldCom.
The Response of President and Parliament
President Bush called for tough new legislation to restore faith in American business.
Mr.Bush said those guilty of corporate fraud should be sent to jail for the sake of US
capitalism. He argued that people guilty of such abuses should be prevented from
holding high-level business positions again.
SOX: Sarbanes-Oxley act 2002, was precipitated by Enron, Arthur Andersen, Tyco,
Global Crossing and WorldCom. WorldCom was seen as the last straw in driving
through legislation.
After Scandal
The company emerged from Chapter 11 bankruptcy during 2004 with about $5.7 billion
in debt and $6 billion in cash.
On February 14, 2005, Verizon Communications agreed to acquire MCI for $7.6 billion.
On

December

2005,

the

Microsoft

announced

that

MCI

will

join

it

by

providing Windows Live Messenger customers "Voice Over Internet Protocol" (VoIP)
service.
This was MCI's last new product called "MCI Web Calling".
Several former finance and accounting executives pleaded guilty to securities-fraud
charges, claiming they were directed by top managers to cover up WorldComs
worsening financial situation. In 2004, former WorldCom CEO Scott Sullivan, who
worked above many of these employees, pleaded guilty to criminal charges. Because of a
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plea bargain, Sullivan was sentenced to only five years in prison in exchanged for
testifying against Bernard Ebbers.
IMPACT ON INTERNATIONAL FINANCE
WorldCom may mark the point when investors, particularly foreigners, finally lose all
confidence in American accountingconfidence that had already been badly dented by a
series of scandals, headed by Enron. WorldCom fired its auditor, Andersen, after it was
discredited by the Enron affair; internal auditors uncovered the fraud and alerted
KPMG, the new external auditors. Plenty of firms that fired Andersen will find that their
new auditor will do its best to prove it is no soft touch.
WorldCom's fraud will also add impetus to the process of improving the regulation of
audit and accounting that was already under way. The Securities and Exchange
Commission (SEC), which until lately had often seemed behind the curve, was quick to
speak out this time. It promised to investigate the accounting improprieties of
unprecedented magnitude; and it briskly charged WorldCom with fraud. Its efforts to
raise the quality of accounting standards set by the Financial Accounting Standards
Board (FASB) will gain extra urgency from the WorldCom fiasco, even though there is
not much that even the best standards can do about a firm determined to act
fraudulently.
Auditors are supposed to spot fraud, and the SEC has already published a plan for better
regulation of auditing, in case Congress fails to pass legislation that delivers it. The SEC
plan has been criticised for being too soft, but WorldCom's fraud makes Congress more
likely to act. Tom Daschle, the Democrat leader of the Senate, now promises an early
vote on an auditing bill proposed by Senator Paul Sarbanes, which is expected to pass
with big bipartisan support. It calls for a much tougher audit cop than does the SEC,
proposing, for instance, to set up a full-time independent board of audit regulation. It
also calls for restrictions on audit firms doing non-audit business.
Whether such a tough bill will become law depends on whether audit reform remains a
hot political issue when the two houses of Congress put together a reconciled bill,

probably in September. Opponents, such as Senator Phil Gramm, a Republican, concede

that delaying a decision is their best strategy.
After the initial excitement of the Enron hearings had died down, Washington had
seemed to be losing interest in cleaning up corporate America. The war on terrorism,
health care and education all registered higher on the public's list of concerns. Now, the
reaction to WorldCom's fraudincluding a pledge by President George Bush to launch a
federal investigation into the firm's outrageous behavioursuggests that polling data
may show sufficient public concern for Washington to need to do something to restore
confidence; mid-term elections, after all, are in November. Wall Street's bosses have
also started to speak up in favour of regulatory reform, including Hank Paulson,
chairman of Goldman Sachs. The combined impact of lawsuits, regulatory investigations
and public opinion appears to make change inevitable, and Wall Street wants to help
shape it.
The Sarbanes bill looks to be what is neededthough it could usefully include among its
provisions the mandatory rotation of auditors. Still, it is hard to predict whether
Washington's involvement might go very much further. The last time Congress really got
to grips with cleaning up abuses in corporate America and on Wall Street was in the
1930s. The effort produced a great many headlines and a lot of legislation, some that
improved the workings of American capitalism, but some that made it less efficient. Will
today's politicians do any better? How sad it would be if, just as market forces and
existing regulators were starting to restore integrity to accounting and to the
boardroom, politicians riding the bandwagon were to mess the whole thing up.

REORGANIZATION AND ACQUISTION

WorldCom took many steps toward reorganization, including securing $1.1 billion in
loans and appointing Michael Capellas as chairman and CEO. WorldCom also tried to
restore confidence in the company, including replacing the board members who failed to
prevent the accounting scandal, firing many managers, reorganizing its finance and
accounting functions, and making other changes designed to help correct past problems
and prevent them from reoccurring. Additionally, the audit department staff is was
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increased and reported directly to the audit committee of the companys new board. We
are working to create a new WorldCom, John Sidgmore said. We have developed and
implemented new systems, policies, and procedures. In 2003, the company renamed
itself MCI and emerged from bankruptcy proceedings in 2004. However, this
reorganization was not enough to restore consumer and investor confidence, and
Verizon Communications acquired MCI in December 2005. The WorldCom accounting
fraud changed the entire telecommunications industry. As part of their overvaluing
strategy, WorldCom had also overestimated the rate of growth in Internet usage, and
these estimates became the basis for many decisions made throughout the industry.
AT&T, WorldCom/MCIs largest competitor, was also acquired. Over 300,000
telecommunications workers lost their jobs as the telecommunications struggled to
stabilize. Many people have blamed the rising number of telecommunication company
failures and scandals on neophytes who had no experience in the telecommunication
industry. They tried to transform their startups into gigantic full-service providers like
AT&T, but in an increasingly competitive industry, it was difficult for so many large
companies could survive.