What is Worldcom?

WORLDcom was a telecommunication company and its peak it was the second largest
telecommunication company just behind AT&T. In 1995 Ebbers became the company’s CEO
and 10 years later it had been happen to acquire over 60 different telecommunications firms. Its
rapid growth helped cement its position as one of the leading telecommunication companies at
that time. At the height of Dot-Com bubble the company was valued at $175 billion

What was the scam?

But during 2000, telecommunication industry started to slow down and WorldCom faced job
cuts, credit rating downgrades and enquiries as well. This caused a decline in WorldCom stock
values from $64 to $2.65. Their revenues fall short of expectations, while debt taken on to
finance mergers and infrastructure investment remains. As a result, CEO Bernard Ebbers
resigned on April 30, 2002. In another specific incident, WorldCom’s Board of Directors lent
$415 million from the company’s coffers to help Ebbers cover some of his personal debts,
amounting to more than $800 million, in an attempt to avoid a massive sell of company stock by
the CEO which would have further driven down the company stock. Corporate loans of $400
million were provided for financing his other business such as timber and yachting for the same
reason. Begins from 1999 to May 2002, WorldCom which is under the direction of Scott
Sullivan (CFO), David Myers (Controller) and Buford “Buddy” Yates (Director of General
Accounting) had used fraudulent accounting methods to hide its declining financial condition by
giving a false picture of financial growth and profitability in order to increase the stock price of
WorldCom.

WorldCom was not just the biggest accounting scandal in the history of the United States—it
was also one of the biggest bankruptcies of all time. To hide its falling profitability, WorldCom
inflated net income and cash flow by recording expenses as investments.
By capitalizing expenses, it exaggerated profits by around $3 billion in 2001 and $797 million in
Q1 2002, reporting a profit of $1.4 billion instead of a net loss.

The internal control system at WorldCom undoubtedly played a role in allowing for the
accounting manipulations to continue for a long period of time as there was no checking and
constrains on their actions and easy for them to do. The employee of WorldCom also do not have
any initiative to communicate the fraudulent actions because worry about losing job.

Actions taken against the top management

Bernard Ebbers was convicted on nine counts of securities fraud and On March 15, 2005, he was
was charged with criminal penalties on fraud, conspiracy and filing false documents with
regulators and was sentenced to 25 years in prison. Other former WorldCom officials were found
guilty and charged on committing fraud and company’s financial misstatements included former
CFO Scott Sullivan(received a five-year jail sentence after pleading guilty and testifying against
Ebbers), former Controller David Myers, former accounting director Bufors Yates and former
accounting managers Betty Vinson and Troy Normand.

THE AUDITORS

The auditors of Worldcom never expect the company would use the fraudulent accounting
practices that are so ridiculously simple and dumb that they oversee those potential fraudulent
misrepresentations. As the auditor Arthur Anderson say, in reality who would think that a chief
financial officer or anyone for that matter at the second largest telecommunications company in
the world would take almost $4 billion of expenses and book them as assets.

In addition, Arthur Anderson, the external auditor of WorldCom since 1989 has been criticized
for its negligence in handling of WorldCom’s accounting policies systems and books. Anderson
did not find out the line costs that has been capitalized and also not having designed its audit to
detect misclassifications of the large amount. Many observers also think that Anderson should
have realized the large and increasing financial loss of WorldCom and pay more attention to its
possibility of aggressive accounting practices. On June 25, after the amount of the illicit entries
was confirmed, the board accepted Myers' resignation and fired Sullivan when he refused to
resign