WORLDCOM FRAUD

By: Barrett Smith

BACKGROUND
Second largest Telecom company in 2002 (behind AT&T)

Made up of WorldCom Group and MCI

Sells voice, data, and internet backbone services to gov, businesses, and consumers Telecom Industry was declining from 1998 - 2002

BERNIE EBBERS
CEO from 1985 to April 2002

Built company from small Mississippi business to Telecom giant

Pushed for corporate loans to cover slipping margins Ousted as CEO before fraud was uncovered

THE FRAUD
Admitted to accounting fraud in June 2002

Arthur Anderson was auditor

Estimated $11 billion in accounting errors Led to $3.8 billion inflated profits over a 5 quarter period

HOW IT WAS DONE

Ongoing operating costs reclassified as capital improvements

Spread costs over several years through depreciation

Led to extremely overstated cash flows and profits Line costs stayed a consistent percentage of revenues

Capital expenses decreased 15% over the 5 quarters

Right on target from 2000 forecast Maintenance labor costs were most likely changed to tweak books

UNCOVERING THE FRAUD

Employees testified in June 2001 that the company was having problems and that they were concerned of the company going forward These original tips were ignored Internal auditors caught the fraud in June 2002 which lead to the confession of: CEO Bernie Ebbers

CFO Scott Sulivan

Controller David Meyers Director of General Accounting Buford Yates

THE EFFECTS
Largest Chapter 11 Bankruptcy Filing in US History July 21, 2002

17,000 jobs cut

CFO, Controller, Directory of Accy, and several other internal auditors fired Arthur Anderson fined millions CEO Bernie Ebbers started 25 year prison sentence in 2006 $366 Million in debt

PREVENTION
Real-time bookkeeping controls

Require review of revision to entries before they are actaully made

Changes to entries exceeding cumulative thresholds internal auditors Email analytics One person made all the fraudulent entries Track conversations Could have been discovered before so much damage was done

SOURCES
http://voices.yahoo.com/worldcom-scandal-look-back-one-biggest-225686.html

http://www.worldcomfraudinfocenter.com/
http://www.time.com/time/business/article/0,8599,266287,00.html http://www.forbes.com/2002/07/08/0708simons.html