Virginia International University

FALL, 2015.
School of Business
MBA 611 Business Ethics & Law

Submitted by
Md Sayed Hasan
ID: 10000126545

To
Dr. Ashley Newell

: Case Study on WorldCom Accounting Fraud

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. Due to its rapid growth, WorldCom is also heavily
in debt as they finance the company growth with debt. 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 in1983.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 1990s, the company starts to grow
through series of successful acquisition and merger. However, during the late 1999, the
companys 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. Other than that, falling telecommunications companies
and new entrants were drastically reducing their prices leads WorldCom. 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. Things
start to come under light at June 2002 and the companys 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 some 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.

WorldCom was the amalgamation of many mergers and acquisitions during the consolidation
phase of the US telecom industry. Ironically, it was less than twenty years since the US had
forced the breakup of AT&T. Its business and moved beyond long distance and had become a big
player in both the local markets as well as the Internet. While a very fast growing company,
WorldComs growth was through acquisition or by renting excess capacity. Its stock price had
really benefited from both the dot.com and telecom bubbles. Unfortunately, its senior leadership
and the resulting corporate culture was fixated on maintaining its high price and began to
take/make ever increasingly aggressive accounting decisions to artificially prop up the stock. As
time went on, these accounting decisions moved from earnings management to fully crossing the
line into a massive accounting fraud. Eventually, the accounting fraud was exposed by Cynthia
Cooper (Head of Internal Audit) and WorldComs financials had to be restated; its pre-tax
income had been overstated by some $7 billion and assets had to be written down by over $80
billion. The resulting outcome of WorldComs failure was huge: market cap fell by almost $180
billion wiping out shareholders, 17000 employees lost their jobs and all employees retirement
accounts became nearly worthless, telecommunications service was jeopardized to 20 million
retail customers as well as critical parts of the US government.
Showing improper accounts to increase the stock price is absolutely unethical in business and
even its not legal to show wrong information to the people what they did. The shareholder has to
know about the correct information about a company. The employees were not allowed to

participate any decision thats mean that they had to do what they were told to by the supervisor
which is not ethical in business.
In a conclusion we can say that anything unethical is not good for the long term basis business.
The truth will always come forward and the effect of any fraudulent cant bring anything good
even the result could be worst. Ebbers has been convicted by a court of law, but remains free on
bail while he pursues an appeal. Although the extent of his punishment is under contention, one
thing remains clear - that Ebbers and the other officers at WorldCom are guilty of presiding over
what is to date, the largest corporate fraud in history.