How Unethical Practices Almost

Destroyed Worldcom
Presented by:
Ankush Jha
Shiv Mohan Mittal
Ujjwal Dogra
Shashi Ranjan Sinha
Neeraj Sharma
Florence
 WorldCom
• Overstated earnings by $3.8 million
• Laid off 17,000 employees
• Stock dropped from $64.50 to 0.83 in a matter of
weeks
• Former CEO received $366 million in low interest
loans
 Failures of corporate governance in the
WorldCom scandal
• Every stakeholder group other than top management
was very poorly served by the WorldCom board of
directors
– Shareholders saw their shares become worthless
– Lenders were forced to take losses on their loans
– Employees lost jobs
– This suggests support for the revisionist model of corporate
governance – the board may reign (de jure) but the imperial
CEO rules (de facto)
 Key Takeaway
• Players in the market place are influenced most by
financial incentives
• Any misalignment of incentives can lead to
undesirable results
– In the case of WorldCom, top management’s financial self
interest trumped all other interests because of the
“revisionist” view of corporate control
– In the case of the auditing firms, consulting provided greater
revenues than auditing, so Andersen turned a blind eye to
corporate misfeasance to secure lucrative consulting business
 The WorldCom Scandal: A Chronology of
Events
• Founded in 1983 by Bernie Ebbers, WorldCom began
as a re-seller of long-distance telephone services.
• Having bought around 50 other small long-distance
firms, the Mississippi-based company
set its sights on MCI, America’s second-biggest long-
distance carrier, in 1997.
• A high share price helped WorldCom outbid
competitors, securing a $37 billion merger in
September 1998.
• Two years later Mr Ebbers tried to buy Sprint,
another American rival, but was
blocked by antitrust regulators on both sides of the
Atlantic.
 WorldCom: Chronology of Events
• With WorldCom’s share price tumbling, and a probe by regulators in the
offing, Mr Ebbers resigned as chief executive in April 2002.
• Shortly after, the discovery of massive fraud in WorldCom’s accounts
shook stock markets around the world and prompted the company to
file for bankruptcy protection.
• Two of its most senior finance officers were charged with fraud.
• Michael Capellas, previously boss at Compaq, took Worldcom's helm. In
May 2003 the company, renamed MCI, settled an investigation into its
accounting for $1.51 billion.
• In August of that year, the outlines of a
radical overhaul of its corporate governance, required by the settlement,
were published, and in November the company emerged from bankruptcy
in better financial shape than its competitors.
• But the company's troubles are not over yet: Oklahoma's attorney general
filed another big lawsuit against it, this one alleging that the company
unfairly exploited the telecoms regulations at the expense of competitors.
• -from the Economist, June 27, 2004
 What was the most salient financial fraud
committed by WorldCom’s top management?
• Over the five quarters leading up to July 2002,
WorldCom “misclassified” almost $4 billion of
telecoms-maintenance costs as capital
spending that could be depreciated over
several years, not one.
 “What will it
profit a man if
he gain the
whole world but
lose his own
soul?”
(Mark 8:36)

Jesus Christ
 How It Happened
WorldCom Environment
Substantial Problems with the Company’s Internal Controls
 WorldCom was dominated by Ebbers and Sullivan, with virtually no
checks and constraints placed on their actions
 Significant pressure to “meet the numbers”
 Lack of courage of employees to communicate the fraudulent
activates – believed it would have cost them their jobs
 A financial system in which controls were extremely deficient
 The BOD and Audit Committee did not appear to have had an
adequate understanding of the company and culture
 Inadequate audits by independent auditors
___________
Source: Report of Investigation by the Special Investigative Committee of the Board of Directors of WorldCom,
Inc.

9
 How It Happened
Macro Business Environment
The 90’s has been labeled by many as the “Perfect Storm”
 The whole system of checks and balances failed
Public Companies Accounting Profession
- Management & Boards -Standard Setters
Investment Banks -Independent Auditors
- Bankers and Analysts Legal Profession
- Institutional Investors
- Individual Investors
 Resulted in a number of high profile business failures and wrongdoings
WorldCom Enron HealthSouth
Qwest Tyco Adelphia
Global Crossing Boeing ImClone

10
Stock Price
• Report: WorldCom board passiveBy Jim Hopkins, USA TODAY
• While WorldCom's board did not appear to know about the company's accounting fraud, it was so passive that it had little chance of discovering it, an internal
WorldCom report charged Monday.
• What's more, the board, by allowing former CEO Bernie Ebbers to rule practically unchecked, created incentives that might have helped spur the misconduct.
• Together, two reports — one internal and one by the bankruptcy court examiner — blast WorldCom's ex-board like never before.
• Instead of guarding investors, they often "rubber-stamped" decisions by Ebbers and former CFO Scott Sullivan. One unnamed board member referred to Ebbers
as "God," "Jesus Christ," and "Superman," says the report by bankruptcy examiner Richard Thornburgh. His report is especially critical in areas that include:
• • Loans. Ebbers got $175 million in personal WorldCom loans before the board even knew it. Moreover, the board — and its compensation committee — failed
to investigate whether Ebbers had the wherewithal to repay the loans, the report says. Ultimately, Ebbers got more than $400 million in such loans. So far, less
than 25% has been repaid, it says.
• One of Ebbers' first company loan requests occurred in 2000. He asked for $50 million. It was approved after Ebbers had a "five-minute" conversation with
compensation committee chairman Stiles Kellett.
• • Pay. Ebbers, rather than the board's compensation committee, usually determined what senior executives earned, the report says. But when the committee
gave Sullivan a $2 million bonus in 2001, Ebbers later stopped it "out of jealousy or anger," because the committee didn't give him a bonus, too, the report says.
Ebbers also had the committee minutes "sanitized" to eliminate any reference to the bonus, the report says.
• • Auditing. The board's audit committee, expected to monitor finances, "rarely scratched below the surface," the report says. Part of its weakness stemmed
from not getting direct reports, unfiltered through senior management, from the internal audit department.
• The committee's effectiveness was further hurt because it didn't require that external auditor Arthur Andersen detail problems, as would typically be the case,
the report says.
• • Deals. The board approved multibillion-dollar mergers and acquisitions with little discussion. One such deal: a $2 billion purchase of SkyTel approved by the
board after a 15-minute management presentation.
• Former directors didn't seem troubled by the deal "because the acquisition was for 'only' $2 billion," the report says.
• Such fast-track deals became even more of a problem after 2000, when WorldCom stock and revenue were falling. "When the board should have been more
assertive, it instead became increasingly passive," the report says.
• WorldCom created a new board as part of a settlement last month with the Securities and Exchange Commission. In additional to Kellett, the Thornburgh report
mentions former directors James Allen, Judith Areen, Carl Aycock, Max Bobbitt, Francesco Galesi, Gordon Macklin and Lawrence Tucker.