Case Study On WorldCom

Topics: Auditing, Balance sheet, Capital expenditure Pages: 21 (1344 words) Published: April 16, 2015
Case study
on
WorldCom
THE WORLDCOM FRAUD:-

Presented By:
Pratik

WorldCom’s Background
• Awoke the sleeping giant by leading the telecom industry into profitability in the 90’s.
• During the 1990’s, WorldCom was deeply involved in
acquisitions and completed several “mega-deals”
• Purchased over 60 firms in 2nd half of the 90’s
• WorldCom moved into Internet and data traffic
• Handled 50% of US Internet traffic
• Handled 50% of e-mails worldwide

WorldCom’s Background (cont.)
• Purchased MCI for $37 billion in 1997
• Not allowed to purchase Sprint in 2000 because of antitrust regulation.

• In 1999 revenue growth halted; stock price dropped
• By 2001 owned a third of the US data cables
• Was U.S.’ 2nd largest long-distance operator in 1998 and 2002
• Had over 20 million customers in 2002

CEO: BERNIE
EBBERS

CFO: SCOTT
SULLIVAN

Introduction of the case:
• WorldCom, US second largest telecommunication company
shocked the world by filing  bankruptcy at 21 July2002.
• The WorldCom filing surpassed Enron and became the largest bankruptcy filing in United States history.
• The collapse of WorldCom did not just affect their employees, retailers, the government but also bankers.
• WorldCom was a multi-billion dollar telecommunications
company that was founded in 1983.The company starts their
business under the name 'Long Distance Discount Services'
(LDDS), providing long distance telecommunication services.
The venture was  profitable right from the start.

• In 1985, Bernie Ebbers became the company's CEO. The company changes its name to WorldCom in 1995.
• During the 1990’s, the company starts to grow through series of successful acquisition and merger. However, during the late 1999, the company’s performance begins to slip due to heightened competition, overcapacity and reduced demand for telecommunication services at the onset of the economic recession and the aftermath of the dot-com bubble collapse.

• All these pressures caused WorldCom to involve in accounting fraud. Scott Sullivan, WorldCom's CFO, begins the process of misallocating as capital expenditure what should have been normal expenses, thus turning losses into profit, creating a smokescreen that the company is performing well.

• Unfortunately for thousands of employees and shareholders, WorldCom used questionable accounting practices and improperly recorded $3.8 billion in capital expenditures, which boosted cash flows and profit over all four quarters in 2001 as well as the first quarter of 2002.

• Things start to come under light at June 2002 and the company’s stock price plunged. Investigations were carried out.

• On June 25, WorldCom admits that it had inflated its earnings by $3.8 billion the largest accounting fraud in history. After series of investigation, the total amount discovered from improper accounting procedures raised to $9 billion causing WorldCom to file bankruptcy in July. Several top management personnel were held responsibilities for the fraud.

How the Fraud took place








From 1998-2000, WorldCom reduced reserve accounts held to
cover liabilities of acquired companies
 WorldCom added $2.8 billion to the revenue line from these reserves
Reserves didn’t cut it; An e-mail was sent in December 2000 to a division in Texas directing misclassification of expenses.
CFO told key staff members to mark operating costs as longterm investments to the tune of $3.85 billion. Huge losses turned into enormous profits.
 $1.38 billion in net income in 2001.

How the Fraud took place (cont.)
• Operating Expenses to Assets
-CFO’s directions affected the income statement:
Revenues

xxx (no change)

COGS

xxx (no change)

rom nt Operating Expenses:
F
ved ateme
o
Fees paid to lease other
Rem me St
o
Inc
companies phone networks:
rom nt
F
ved ateme
o
Computer expenses:
Rem me St
o
Inc

xxx (Huge Decrease)

xxx (Huge Decrease)

How the Fraud took...
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