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WorldCom Bankruptcy Examiners Report #1

WorldCom Bankruptcy Examiners Report #1

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Published by Aaron Monk

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Categories:Types, Business/Law
Published by: Aaron Monk on Sep 14, 2010
Copyright:Attribution Non-commercial

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10/31/2011

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DC-541006 v10 0307083-0100
UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORKIn re:WORLDCOM, INC., et al.Debtors._____________________________________§§§§§§§Chapter 11Case No. 02-15533 (AJG)Jointly AdministeredFIRST INTERIM REPORT OF DICK THORNBURGH,BANKRUPTCY COURT EXAMINERNovember 4, 2002Kirkpatrick & Lockhart LLP1800 Massachusetts Avenue, N.W.Washington, D.C. 20036(202) 778-9000(202) 778-9100 (fax)
Counsel to Dick Thornburgh, Bankruptcy Court Examiner
 
Table of Contents
i
I. INTRODUCTION...............................................................................................................1II. PROCESS OF EXAMINATION AND NATURE OF FIRST INTERIM REPORT..........2III. SUMMARY OF INITIAL OBSERVATIONS....................................................................6IV. FACTUAL BACKGROUND..............................................................................................9A. Overview of the Telecommunications Industry:
The Breakup of AT&T and the Advent of a Highly-Competitive Marketplace.
...........................................................................9B. The Evolution of WorldCom:
Growth that Presented Significant Challenges.
.........11C. Five Phases of Growth and Transformation................................................................121. The Emergence of LDDS (1983 1989):
 Expansion of a Reseller Network and Becoming a Public Company.
.....................................................................................122. From LDDS to WorldCom (1990 1995):
 Expansion to a National and  International Long Distance Provider and Acquisition of Significant 
 
TransmissionFacilities.
............................................................................................................................143. WorldCom (1996):
 Expansion into Local Markets and Internet Service.
............164. WorldCom (1997 1998):
Consolidation of Its Leadership Position in Local and Long Distance Telecommunications Services.
..................................................175. WorldCom (1999 2001):
 Expansion of Wireless and Web Services.
.................19D. WorldCom 2001: The Downturn for Telecom:
Falling Share Prices, Failure of a Tracking Stock Initiative and Signs of Trouble.
....................................................................20E. Recent Developments..................................................................................................221. March 2002 SEC Investigation...........................................................................222. April 2002..............................................................................................................23a. Significant Reduction of Workforce..........................................................23b. Resignation of Mr. Ebbers.........................................................................233. May 2002...............................................................................................................24a. Change of Auditors....................................................................................24b. Draw Down on Line of Credit...................................................................244. June 2002...............................................................................................................24a. Lowering of Credit Rating.........................................................................24b. Discovery of the Capitalization of Line Costs...........................................24c. June 25 Public Announcement of Restatement of Earnings......................29d. SEC Enforcement Action Against the Company and Appointment of the Corporate Monitor..................................................................................................305. July 2002 Chapter 11 Filings..............................................................................306. Further Restatement of EBITDA...........................................................................317. Criminal and SEC Actions Against Former Officers and Employees...................31F. The Company’s Response to Developments in 2002..................................................321. New Members of Senior Management..................................................................322. New Directors........................................................................................................333. Enhancements to the Company’s Accounting, Audit and Internal ControlFunctions............................................................................................................................33
 
ii
a. Permanent Controller and Establishment of SubControllers.....................33b. Restatements Group...................................................................................34c. New CFO Positions....................................................................................34d. An Increase of Internal Audit Staffing.......................................................34G. WorldCom’s Current Business....................................................................................35H. The Management Structure at WorldCom...................................................................36I. The Board of Directors................................................................................................371. Composition...........................................................................................................372. Board Meetings......................................................................................................383. Director Compensation and Stock Ownership.......................................................394. Board Committees..................................................................................................40a. The Audit Committee.................................................................................41b. The Compensation and Stock Option Committee.....................................41V. The Finance and Accounting Process................................................................................43A. Introduction..................................................................................................................43B. The WorldCom Finance Group....................................................................................44C. Overview of Revenue Budgeting and Planning...........................................................461. Annualized Budget Plans.......................................................................................462. Monthly Revenue Forecasts, Analyses and Outlooks............................................473. Process to Meet Projected Revenues.....................................................................47D. The WorldCom Financial Reporting Process..............................................................48E. The Role of the Independent Auditors.........................................................................491. Independent Auditor’s Responsibilities vs. Management’s Responsibilities........492. WorldCom’s Relationship with Arthur Andersen.................................................503. The Company’s Internal Audit Function...............................................................52a. The Role of the Internal Audit Department...............................................53b. Preliminary Observations Regarding the Company’s Internal AuditDepartment...................................................................................................................541. The Absence of a Comprehensive Audit Plan.......................................................552. Audit Committee Oversight...................................................................................553. Reports to Company Management.........................................................................564. Staffing and Compensation....................................................................................575. Dealings with Arthur Andersen.............................................................................57VI. ACQUISITIONS AND OTHER TRANSACTIONS........................................................58A. Volume of Transactions...............................................................................................59B. Apparent Absence of Defined Strategic Plan..............................................................60VII. PERSONAL ENRICHMENT AND RELATED CONTROLS.........................................63A. Introduction..................................................................................................................63B. The Compensation Packages Awarded to Mr. Ebbers.................................................64

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