WORLDCOM ACCOUNTING SCANDAL
HOW TO CHEAT YOUR WAY TO TOP BY BERNARD EBBERS
The story of WorldCom started in 1983 whilst businessmen Murray Waldron and William Rector sketched out a plan to create a longdistance telephone provider company on a napkin in a coffee shop in Hattiesburg, Mississippi. Their new corporation, Long Distance Discount Service (LDDS), started running as a long-distance reseller in 1984. Early investor Bernard Ebbers turned into named CEO the following year. Through acquisitions and mergers, LDDS grew speedy over the following 15 years. The corporation modified its name to WorldCom, carried out a global presence, obtained telecommunications massive MCI, and ultimately increased past long-distance providers to provide the entire variety of telecommunications services. WorldCom had become the second-biggest long-distance telephone corporation in America and the organization is regarded as poised to become one of the biggest telecommunications agencies in the world. Instead, it became the largest bankruptcy filing in U.S. history at the time and another name on a long listing of these disgraced through the accounting scandals of the early twenty-first century.
What really was going on
However, from 1999 to early 2002, the CEO of the company, Bernard Ebbers alongside different senior control used fraudulent and wrong accounting strategies to deceive buyers and different directors. Their fraudulent accounting technique had two main approaches: ‘The reduction of reported line costs’ and the ‘exaggeration of reported revenue’. These practices have been to disregard the usually accepted accounting principles (GAAP) in addition to not informing the customers of the financial statements of the modifications to the formerly used accounting practices. This was done to lessen their E/R ratio, the primary key overall performance indicator used to measure the overall performance of telecommunications companies. To hide its falling profitability, WorldCom inflated net income and cash flow by recording expenses as investments. By capitalizing on expenses, it exaggerated profits by $3.8 billion in 2001 and $797 million in Q1 2002, reporting a profit of $1.4 billion instead of a net loss. These accounting practices made it appear as if WorldCom’s financial situation was improving every quarter. As long as WorldCom continued to acquire new companies, accountants could adjust the values of assets and expenses. Investors, unaware of the alleged fraud, continued to purchase the company’s stock, which pushed the stock’s price to $64 per share.
When the planned acquisition of Sprint Corporation in 1999-2000 was stopped through pressures from the United States Department of Justice and the European Union over worries of its growing monopoly. As a result, WorldCom faced severe setbacks as Ebbers (CEO) lacked technology experience and a strategic sense of direction as he relied mostly on mergers for the expansion of business.
• The First Whistleblower:
Kim Emigh was a budget analyst at WorldCom. Soon after he was employed in 1996, Emigh witnessed unscrupulous business practices, such as near-private relationships among business enterprise executives and the providers to whom they awarded contracts and contractors who were paid exorbitant rates. When Emigh questioned those and different issues, management flatly informed him to butt out. Though not officially reprimanded, Emigh`s boss threatened him with termination. Emigh requested a transfer and, over the next several years, was promoted multiple times—all the way to management—continually with glowing reviews. By 2000, business was slowing down for WorldCom, however, the costreducing measures some managers asked for were often improper. Emigh pushed back against bad business directives, such as not paying vendors timely. But in past due 2000, he and others had been requested to do something Emigh believed to be outright illegal—misclassify costs in the accounting books. Emigh baulked at carrying out the order and blew the whistle to the chief operating officer. The order was halted before it was performed but, quickly after that Emigh was fired.
• The Second Whistleblower
No one outside of his department had heard of Kim Emigh till Cynthia Cooper, head of WorldCom`s internal audit department, caught wind of Emigh`s allegations and decided to investigate. Emigh`s whistleblowing had put a stop to one accounting scheme, however, some others took its place. With sales plummeting, a few WorldCom professionals devised some other concept for cooking the books. Under the made-up period "prepaid capacity," corporation accountants have been instructed to book certain costs, which include the rentals of community lines, as capital expenses, in place of operating charges. Capital expenses are for assets and may be spread out over years while operating expenses must be identified in full when they occur. Similar to the formerly concocted plan, this transformation led to fiscal reports that confirmed a healthy, profitable corporation; in truth, WorldCom was careening toward bankruptcy. When Cooper and her auditing crew seemed into Emigh’s claims, they stumbled over $1.4 billion in capital expense entries for “prepaid capacity.” Cooper had never heard the term before; neither had any of the accountants she requested for an explanation. Furthermore, there was nothing to back up those entries—no invoices, receipts, or helping documentation of any kind. All told, auditors uncovered $3.9 billion in operating expenses that were transferred to capital expense accounts. When word of the investigation reached the executives who had ordered the deceitful entries, Cooper was asked to drop it. She didn`t. Instead, Cooper went to the chair of WorldCom`s board`s audit committee and blew the whistle on the corporation`s fraudulent accounting.
• Securities and Exchange Commission (SEC)
Following Cooper`s report, the Securities and Exchange Commission (SEC) released its own investigation into WorldCom`s accounting and found that the company had overstated property via way of means of a staggering $11 billion. At the time, it was the biggest company accounting fraud case in US history. The SEC charged WorldCom with civil fraud and reached a $2.25 billion settlement.
• Bernard Ebbers was convicted on nine counts of securities fraud and sentenced to 25 years in prison in 2005. Former CFO Scott Sullivan received a five-year jail sentence.
• WorldCom filed for Chapter 11 bankruptcy protection and, in 2006, what remained of the once-mighty corporation was purchased by Verizon.
• Congress passed the Sarbanes-Oxley Act (SOX), a corporate governance law which, among other things, holds top executives personally liable for the accuracy of a company’s financial statements. SOX covers a range of elements, such as maintaining auditor independence, conflicts of interest, financial disclosures, responsibilities of a corporation’s board, and penalties for whitecollar crime. The law also mandates that companies provide a means for employees to anonymously report questionable accounting or other dubious acts .