WORLDCOM

- Case Study
 Introduction
• WorldCom telecommunication company earlier known as LDDS (Long distance discount service)
began its operations in 1994, providing services to local retail and commercial customers in southern
states.
• It was founded by William G. McGowan and John D. Goeken.
• From 1995-2000, WorldCom purchased over sixty other telecom firms.
• It had a global workforce of 80,000.
• It moved into internet and data communications handling 50% of all US internet traffic and 50% of all
emails world wide.
• They were the second-largest long distance carrier in 1998 and 2002.
 Timeline
Long Distance Discount Service (LDDS) started it operations after AT&T broke up.
1984

LDDS became a public company and fourth largest carrier in United States after
1989-
1993 merging with various business entities viz. Advantage Companies.

Worldcom came into existence.

1995

Worldcom acquired MFS Communications company for $12.4 billion dollars and MCI
1996- for $42 billion
1997

US Justice Department terminated the WorldCom attempt to acquire Sprint.

1999

The Telecommunication industry conditions began to deteriorate .

2000

Worldcom manipulated the books of accounts and reported that their profits inflated by
2000-
2002
$3.8 Billion

July 21 Worldcom files for bankruptcy.

2002
 Expense – to – Revenue (E/R) Ratio
• Ebbers wasn't looking for market share or company growth but wanted to be best stock on the wall
street.
• He wasn’t concerned with future of company but had his mind set on short term gains.
• The clause that Ebbers accepted made WorldCom mandatory to meet expectations otherwise it
would have to pay line capacity.
• In 2000 telecommunication began to decline and there were heavy competition in the market.
• WorldCom’s E/R ratio was about 42% in 2000 and the company struggle to maintain it in subsequent
quarters, so CFO Sullivan decided to use accounting entries to achieve target performance.
• The main two accounting tactics Sullivan and his staff used were accrual releases in 1999 and 2000,
and Expense Capitalization of line cost in 2001 and 2002.
 Accrual Releases
Balance Sheet and Profit and loss statement (1999 & 2000)
7905 +3731 /
19736 * 100 = 59%

7905 / 19736
* 100 = 40%

• When the bill for line costs were not met or paid until several months company estimated these
expected payments and matched these expenses with revenues in its income statement. It reduced
the liability accrual when the future payment was owed to lower line owner. When bills came in an
amount less than estimated it reversed some accruals with excess flowing into income statement as
reduction of line expenses. Throughout 1999-2000 Sullivan guided the staff to release accrual that
were too high relative to future cash payments. At the same time he told several managers that MCI
had created a substantial amount of such over accruals.
 Expense Capitalization
• By the first quarter of 2001 – there was a lot pressure on Sullivan and his lieutenants to maintain 42%
E/R Ratio. He came with creative solution to identify the cost of excess network capacity, he reasoned
that these cost could be treated as capital expenditure rather than operating cost.
• He directed Myers and Yates to order managers in company general accounting department to
capitalize $771 million of non revenue generating expenses into an asset account as “construction in
process”. The accounting manager were subsequently told to reverse $227 million of the capitalized
amount and to make a $227 million accrual release from Ocean Cable Liability.

$77 $77
Non-Revenue
1 Generating Line 1
($227) Ocean Cable
Expenses Liability
$54 Revised Line
4 Expenses
 Conclusion
Hence, we conclude that there was major manipulation of books of accounts at WorldCom
telecommunication through various approaches like Expense to revenue ratio, accrual
releases and expense capitalization. They were also providing false information related to
profits, expense revenue ratio etc. to avoid market devaluation of shares. The company
followed an unethical business pattern in order to maintain credibility and position.
Precautions could have been taken to avoid these situations by maintaining more
transparency in the company and more attention by the internal and outside auditors, Board
members and other related departments to the matter.