ACCOUNTING FRAUD SCANDAL

BACKGROUND OF THE COMPANY

The company began as Long Distance Discount Services, Inc. (LDDS) during 1983, based in
Jackson, Mississippi. In 1985 LDDS selected Bernard Ebbers to be its CEO. The company
became traded publicly as a corporation in 1989 as a result of a merger with Advantage
Companies Inc. The company name was changed to LDDS WorldCom in 1995, and relocated
to Clinton, Mississippi.

The company grew rapidly in the 1990s. Among the companies that were bought or merged
with WorldCom were Advanced Communications Corp. (1992), Metromedia Communication
Corp. (1993), Resurgens Communications Group (1993), IDB Communications Group, Inc
(1994), Williams Technology Group, Inc. (1995), and MFS Communications Company (1996),
and MCI in 1998. The acquisition of MFS included UUNET Technologies, Inc., which had been
acquired by MFS shortly before the merger with WorldCom. In February 1998, WorldCom
purchased—by a complex transaction—online pioneer company CompuServe from its parent
company H&R Block. WorldCom then retained the CompuServe Network Services Division,
sold its online service to America Online, and received AOL's network division, ANS. The
acquisition of Digex (DIGX) during June 2001 was also complex; WorldCom acquired Digex's
corporate parent, Intermedia Communications, and then sold all of Intermedia's non-Digex
assets to Allegiance Telecom.

MCI WorldCom logo (used from 1998–2000). On November 4, 1997, WorldCom and MCI
Communications announced their US$37 billion merger to form MCI WorldCom, making it the
largest corporate merger in U.S. history. On September 15, 1998, the new company, MCI
WorldCom, opened for business, after MCI divested itself of its successful "internetMCI"
business to gain approval from the U.S. Department of Justice.

WorldCom logo (used from 2000–2003). On October 5, 1999, Sprint Corporation and MCI
WorldCom announced a $129 billion merger agreement between the two companies. Had the
deal been completed, it would have been the largest corporate merger in history. The merged
company would have surpassed AT&T as the largest communications company in the United
States. However, the deal floundered due to opposition from the U.S. Department of Justice
and the European Union on concerns that it would create a monopoly. On July 13, 2000, the
boards of directors of both companies terminated the merger. Later that year, MCI
WorldCom renamed itself simply "WorldCom".

i. WHAT HAPPEN TO THE COMPANY?

In 1999, revenue growth slowed and the stock price began falling and continuing at an
accelerated pace through May 2002, the company—directed by Ebbers (as CEO), Scott
Sullivan (CFO), David Myers (Controller), and Buford "Buddy" Yates (Director of General
Accounting)—used fraudulent accounting methods to disguise its decreasing earnings to
maintain the price of WorldCom’s stock.The fraud was accomplished primarily in two
ways:*Booking "line costs" (interconnection expenses with other telecommunication
companies) as capital expenditures on the balance sheet instead of expenses. *Inflating
revenues with bogus accounting entries from "corporate unallocated revenue accounts".

EO Bernard Ebbers became very wealthy from the increasing price of his holdings in
WorldCom common stock. However, in the year 2000 the telecommunications industry was
in decline. WorldCom’s aggressive growth strategy suffered a serious setback when, in July
2000, it was forced by the U.S. Justice Department to abandon its proposed merger with
Sprint. By that time, WorldCom’s stock price was decreasing, and banks were placing
increasing demands on Ebbers to cover margin calls on his WorldCom stock that were used to
finance his other businesses (lumber and yachting, among others). To increase revenue,
WorldCom reduced its money in reserve by 2.8 billion and moved that money into its revenue
line in the financial statements. That however wasn't enough to boost the earnings that
WorldCom needed to meet expectations. 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. In 2001, Ebbers persuaded WorldCom’s board of directors to provide
him corporate loans and guarantees in excess of $400 million to cover his margin calls. The
board hoped that the loans would avert the need for Ebbers to sell substantial amounts of his
WorldCom stock, as his doing so would result in a further decrease of the stock's price.
However, this strategy failed. In April 2002, Ebbers resigned as CEO and was replaced by John
Sidgmore, former CEO of UUNET Technologies Inc.

ii. HOW THEY DISCOVER THE FRAUD?

The internal audit team had noticed accounting irregularities in MCI's books, the SEC
requested that WorldCom provide more information. Soon thereafter, the company’s audit
committee and board of directors were notified of the fraud and acted swiftly: Sullivan was
dismissed, Myers resigned, Arthur Andersen withdrew its audit opinion for 2001, and the U.S.
Securities and Exchange Commission (SEC) began an investigation into these matters on June
26, 2002 .The SEC became suspicious once AT&T (another telecom giant) was losing money
but WorldCom on the other hand was making so much. The 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. By the end of 2003, it was estimated that the company's total
assets had been inflated by about $11 billion.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.This made the WorldCom scandal the largest
accounting fraud in American history.

iii. WHAT ARE THE PENALTIES OF THE COMPANY?

By the bankruptcy reorganization agreement, the company paid $750 million to the SEC in
cash and stock in the new MCI, which was intended to be paid to wronged investors.The
company emerged from the Chapter 11 bankruptcy during 2004 with about $5.7 billion in
debt and $6 billion in cash. About half of the cash was intended to pay various claims and
settlements. Previous bondholders ended up being paid 35.7 cents on the dollar, in bonds
and stock in the new MCI company. The previous stockholders' stock was cancelled, making it
totally worthless.

It had yet to pay many of its creditors, who had waited for two years for a portion of the
money owed. Many of the small creditors included former employees, primarily those who
were dismissed during June 2002 and whose severance and benefits were withheld when
WorldCom filed for bankruptcy.

On August 7, 2002, the exWorldCom 5100 group was formed. It was composed of former
WorldCom employees with a common goal of seeking full payment of severance pay and
benefits based on the WorldCom Severance Plan. The "5100" stands for the number of
WorldCom employees dismissed on June 28, 2002 before WorldCom filed for bankruptcy.

On February 14, 2005, Verizon Communications agreed to acquire MCI for $7.6 billion.On
March 15, 2005, Bernard Ebbers was found guilty of all charges and convicted of fraud,
conspiracy and filing false documents with regulators — all related to the $11 billion
accounting scandal. Other former WorldCom officials charged with criminal penalties in
relation to the company's financial misstatements include former CFO Scott Sullivan (entered
a guilty plea on March 2, 2004, to one count each of securities fraud, conspiracy to commit
securities fraud, and filing false statements), former comptroller David Myers (pleaded guilty
to securities fraud, conspiracy to commit securities fraud, and filing false statements on
September 27, 2002), former accounting director Buford Yates (pleaded guilty to conspiracy
and fraud charges on October 7, 2002), and former accounting managers Betty Vinson and
Troy Normand (both pleading guilty to conspiracy and securities fraud on October 10, 2002).
On July 13, 2005, Bernard Ebbers received a sentence that would keep him imprisoned for 25
years. At time of sentencing, Ebbers was 63 years old. On September 26, 2006, Ebbers
surrendered himself to the Federal Bureau of Prisons prison at Oakdale, Louisiana, the
Oakdale Federal Correctional Institution, to begin serving his sentence.

In December 2005, Microsoft Corporation announced that MCI will join it by providing
Windows Live Messenger customers "Voice Over Internet Protocol" (VoIP) service to make
telephone calls. This was MCI's last new product—- called "MCI Web Calling". After the
merger, this product was renamed "Verizon Web Calling".In March 2007, 16 of WorldCom's
17 former underwriters reached settlements with the investors. Citigroup settled for $2.65
billion on May 10, 2004.

CONCLUSION
Business may be successful or not but if the top management is responsible for leading and
more responsible for setting their objectives and do appropriately their task it would be a
step for their success. Ethical behavior of a company must be apply or do first by the higher
management then it would follow by the employees. The management must lead their

business through the right path that is how business ethics must applied, although there's an
easy way to induce or manipulate earnings with improper accounting entries to persuade
other companies that your company is wealth even though its not they must think what is the
consequences of that and just like the WorldCom that lead to the destruction of the
company.

In terms of doing what is right there's a lot of circumstances that may lead you to do wrong
but if you think twice and think what is the best decision to make then even you are confused
what to do and if you think its more convenient to do what you know the right thing even it
would be risky for the company then you will be able to make a good decision. Management
is analyzing the facts that the company would be and make decisions not for the sake of the
image but in the sense that they must prepared to be true as a reliable and accuracy that
their company would be in the industry not to do fraud but to do their services fairly. Then if
you step in the dark zone without knowing what it would bring to the company then it would
be sink in the middle of the course. Auditing must do to correct and check for the statements
that will define how wealth is the company and how the company will be in the leading
business in the industry. They must not allow others to take what you believe for what is
right because in some ways there is a time that will tempt you to do wrong but if you stand
for the good then you will do your job diligently as you learn after so many years to be a
professional. Dont let one mistake take these things to you, do what you think its right and if
you are confused think again until you make a decision. Once you commit a mistake it will not
be forgotten and like in worldcom it would be a legendary mistakes and turn all to the dust.

"Regardless of new business controls and regulations, fraud examiners and internal auditors
will always discover internal fraud - much of the time perpetrated by top executives - and
then will be faced with ethical decisions. What kind of encouragement and advice can you
give them as they try to honestly and diligently work at their jobs?"(Carozza, 2008)

"Listen to your instinct. If something doesn't feel or seem quite right, it might not be. If
people are acting out of character or appear to be working to head you in another direction,
step back and ask yourself why. Auditing can often be a plodding process of developing facts,
checking and re-checking theories, and connecting the dots. Continue to ask for support and
dig until you are satisfied that you've gotten it right. Don't allow yourself to be intimidated by
superiors."(Carozza, 2008)

REFERENCES
https://en.m.wikipedia.org/wiki/MCI_Inc

https://www.sec.gov/litigation/litreleases/lr18147.htm

"http://articles.latimes.com/2003/may/20/business/fi-world20"

https://worldcomfraud.weebly.com/background.html

http://schuellerworldcom.blogspot.com/2012/10/my-personal-feeling-in-conclusion-
of.html?m=1