WorldCom Inc.

Satish C Pandey and Pramod Verma

describes a real-life situation faced, a decision or action taken by an individual manager or by an organization at the strategic, functional or operational levels

MANAGEMENT CASE

BREAKING NEWS!
WorldCom Announces Intention to Restate 2001 and First Quarter 2002 Financial Statements CLINTON, Miss., June 25, 2002 –- WorldCom Inc. (Nasdaq: WCOM, MCIT) today announced that it intends to restate its financial statements for 2001 and the first quarter of 2002. As a result of an internal audit of the company’s capital expenditure accounting, it was determined that certain transfers from line cost expenses* to capital accounts during this period were not made in accordance with the generally accepted accounting principles (GAAP). The amount of these transfers was $3.055 billion for 2001 and $797 million for the first quarter of 2002. Without these transfers, the company’s reported EBITDA would be reduced to $6.339 billion for 2001 and $1.368 billion for the first quarter of 2002, and the company would have reported a net loss for 2001 and for the first quarter of 2002. The company promptly notified its recently engaged external auditors, KPMG LLP, and asked them to undertake a comprehensive audit of the company’s financial statements for 2001 and 2002. The company also promptly notified Andersen LLP, which had audited the company’s financial statements for 2001 and reviewed such statements for the first quarter of 2002, upon discovering these transfers. On June 24, 2002, Andersen advised WorldCom that in light of the inappropriate transfers of line costs, its audit report on the company’s financial statements for 2001 as well as its review of the company’s financial statements for the first quarter of 2002 could not be relied upon. The company will issue unaudited financial statements for 2001 and for the first quarter of 2002 as soon as practicable. When an audit is completed, the company will provide new audited financial statements for all the required periods. Also, WorldCom is reviewing its financial guidance. The company terminated Scott Sullivan, the Chief Financial Officer (CFO) and Secretary, and accepted the resignation of David Myers, the senior Vice President and Controller. WorldCom notified the Securities and Exchange Commission (SEC) of these events. The Audit Committee of the Board of Directors retained William R McLucas of the law firm of Wilmer, Cutler & Pickering, the former Chief of the Enforcement Division of the SEC, to conduct an independent investigation of the matter. The same evening, WorldCom also notified its lead bank lenders of these events. The expected restatement of operating results for 2001 and 2002 is not expected to have an impact on the company’s cash position and will not affect WorldCom’s customers or services. WorldCom has no debt maturing during the next two quarters. “Our senior management team is shocked at these discoveries,” said John Sidgmore who was appointed the WorldCom CEO on April 29, 2002. “We are committed to operating WorldCom in accordance with the highest ethical standards.” “I want to assure our customers and employees that the company remains viable and committed to a long-term future. Our services are in no way affected by this matter and our dedication to meeting customer needs remains unwavered,” added Sidgmore. “I have made a commitment to driving fundamental changes at WorldCom and this matter will not deter the new management team from fulfilling our plans.”

KEY WORDS Organizational Decline Corporate Governance Ethical Leadership Corrupt Behaviour

* ‘Line costs represent the fees WorldCom paid to third party telecommunication network providers for the right to access the third parties’ networks. Under GAAP, these fees must be expensed and could not be capitalized.

VIKALPA • VOLUME 29 • NO 4 • OCTOBER - DECEMBER 2004

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The losers included banks. and making extraordinary payments to senior officers. mutual funds. issued on June 25. These events had very strong impact on the US government. The chronology of events listed in Box 1 gives an indication about the debacle of WorldCom. 2002. I am convinced that WorldCom will emerge a stronger. It also issued an order to WorldCom for filing a sworn statement describing facts and circumstances concerning the matter under investigation. Standard & Poor (S & P) lowered its long-term corporate credit rating on WorldCom Inc. Jack Grubman to testify on July 8. and GE. With each coming day. 2002. J P Morgan Chase. On June 27. Citing the highest degree of uncertainty in WorldCom’s ability to repay its outstanding debt of some $ 30 billion. The Securities and Exchange Commission declared in its statement: “The WorldCom disclosures confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets.” Press release from WorldCom Inc. As the news broke out. Nasdaq halted trading on WorldCom and MCI Group shares. The company had established itself as a local. operating in more than 65 countries. this is expected to save $900 million annually. These efforts include: • Cutting capital expenditures significantly in 2002: We intend the capital expenditures of 2003 to be $2. network facilitiesbased competitor in more than 21 countries throughout Europe. Source: www.000 buildings. attrition and contractor terminations. The company now found itself in a whirlpool of problems. Deutsche Bank. Jed S Rakoff. the US House Financial Services Committee asked WorldCom top executives Bernard Ebbers and Scott Sullivan and its investment banker’s telecom analyst. • Downsizing workforce by 17. These sales would reduce losses associated with these operations and allow the company to focus on its core businesses. “We intend to create $2 billion a year in cash savings in addition to any cash generated from our business operations. • Creating a new position of Chief Service and Quality Officer: This would help in keeping an eye focused on customer services during the restructuring. . and the Asia-Pacific region. it triggered off the biggest crash in the history of US stock markets.worldcom.1 billion on an annual basis. Technology and telecom stocks were especially hit hard. the situation worsened further. more competitive player. US Securities and Exchange Commission (SEC) filed a civil fraud suit against WorldCom and requested the court for an order to prevent the company from disposing off assets. 2002. issued an order to WorldCom to preserve documents and assets and to appoint a corporate monitor to keep an eye on WorldCom’s activities. • Selling a series of non-core businesses: Exiting the wireless resale business would save $700 million annually. and F preferred stock dividends in common stock rather than cash. WorldCom shares fell as low as nine per cent before the halt. the US district court Judge.com T his press release sent out clear signals about the financial lapses and the serious accounting misdemeanors in WorldCom. The US House Energy and Commerce Committee also issued a notice to seek documents for its own probe. Citigroup. WorldCom’s core business activities are divided into two major segments: 114 114 WORLDCOM INC. On June 27. WorldCom CEO. • Paying Series D. Aftershocks were felt even in the White House. and other financial services firms including Bank of America. John Sidgmore wrote a letter to President George Bush about the actions taken by WordCom regarding irregularities in accounting practices. 2002. The stock markets in other countries experienced similar repercussions.000: Primarily composed of discontinued operations. 2002. E. Telecommunications services in these countries accounted for three quarters of the $800 billion global market. “By focusing on these steps. COMPANY BACKGROUND Business WorldCom was a pre-eminent global telecommunications company (fourth ranked Fortune 500 company for telecom sector as per Fortune magazine. and discontinuing the MCI tracker dividend: This would mean a saving of approximately $375 million annually. On June 26.Actions to Improve Liquidity and Operational Performance As Sidgmore previously announced.” said Sidgmore. The company is also exploring the sale of other wireless assets and certain South American assets. WorldCom will continue its efforts to restructure the company to better position itself for future growth. 2002. destroying documents. Its global network reach was more than 96. 2002 issue).000 route miles and included high-capacity connections to more than 70. pension funds. deferring dividends on MCI QUIPS. North and South America. to ‘CCC-‘ from ‘B+’.” On June 28. April 12. operations and technology functions. • Continuing discussions with the bank lenders.

and General Electric’s GE Capital financing arm. But. WorldCom also accepted this court order. cash. and internet protocol networks. 2002: WorldCom said its options both for external funding or reorganization are open. Standard&Poor further downgraded WorldCom’s debt to ‘D. 2002. MCI provided retail services to consumers and small businesses in the US. Richard Breeden.84 billion accounting fraud. Ex-WorldCom officials — Former CEO. furniture.5 million six weeks before publicly disclosing a $4 billion accounting cover-up.0 per cent of the net income. July 9. WorldCom listed its assets worth $107 billion as on March 31. and the banks involved in its May 2001 bond offering. 2001 and June 25. 19 call centres with highly effective sales representatives. 2002: WorldCom said in a sworn statement to the SEC that its Audit Committee was reviewing its financial records for 1999 through 2001 regarding ‘certain material reversals of reserve accounts. They also reported about the appointment of William McLucas. US House of Representatives.4 per cent of the total assets for the year 2001.4 per cent of the total assets for the year 2001. mentioning WorldCom’s commitment to investigate the accounting problem honestly. 2002. July 12. • Design. The businesses attributed to the WorldCom group accounted for 60.Box 1: Events Leading to the Debacle of WorldCom June 28. 2002: WorldCom said it would not pay $ 71 million dividend to shareholders of MCI group common stock that was scheduled to be paid on July 15. July 11.7 per cent of the net income. July 16. This increased their chances of filing for bankruptcy. • Commercial voice services. It assured to secure a DIP funding agreement from Citigroup. its former executives. to perform independent investigation of the case. SEC. against the debt of $41 billion (A brief note on Chapter 11 is given in Exhibit 1). 2002: A former SEC Chairman. July 8.7 per cent of the net income and 13. the MCI group accounted for 41. John Sidgmore. WorldCom also said it could be delisted from the Nasdaq market on July 5.2 per cent of the total revenues. Bert Roberts. 2002. was named by a New York judge as a corporate monitor to oversee WorldCom operations. investments. former Chief of Enforcement Division. wireless messaging. MCI Group Operations This included a broad range of retail and wholesale communications services (long distance voice and data communications. and a tradition of developing innovative calling plans that enhance customer retention. July 3. asynchronous transfer mode. virtual private networks (VPN).5 million of WorldCom’s assets. fixtures and equipment. The businesses attributed to MCI group accounted for 39. other intangible assets.’ The company had received notice from some of its lenders saying that they could demand immediate repayment for defaulted loans. And. opening at about eight cents. 2002: New York district court ordered a freeze on $2. 1. The filing allowed WorldCom to continue operating while it worked out a plan to pay its debts. 2002: WorldCom Chairman. including voice switches. submitted their statements before the Committee on Financial Services.DECEMBER 2004 it accounted for 58. July 1. the nationally recognized brand. implementation. 2002: WorldCom moved to finalize a debtor-in-possession funding (DIP) pact that would give it money to operate under possible bankruptcy reorganization. WorldCom Group Operations Business operations attributed to this group included: • Data services such as frame relay.’ July 21. July 17. and other long-term and current assets as well as goodwill.5 million in investment losses.0 per cent of 115 115 . The assets attributed to WorldCom group included all its network assets (except voice switches and dialup internet modems).7 per cent of the total revenues.3 per cent of the total revenues. and 85. 62. 2002: WorldCom missed $79 million in debt payments. and web-enabled products. seeking to recover $318. WorldCom filed for protection of the southern district of New York. In the bankruptcy petition. J P Morgan Chase. and CEO. 101. 38. and CFO. 2002: Angry US investors holding WorldCom bonds filed a class-section suit in a Federal Court in Mississippi brought on behalf of the bondholders by New York’s Wechsler Harwood Halebian and Feffer for actions acquired between April 26. 2002: Three California pension funds sued WorldCom. The company’s shares were resumed on the Nasdaq. • Internet-related services including dedicated access. • International communications services. dial-up internet modems. and on-going management of customer’s communications system. digital subscriber lines. and dial-up internet access services). July 15. consumer local voice communications. buildings.2 per cent of the total assets. VIKALPA • VOLUME 29 • NO 4 • OCTOBER . private line services. July 15. for the year 2000. 2002: A group of 25 banks charged in a lawsuit that WorldCom defrauded them out of nearly $ 2. extensive customer relationships. Scott Sullivan — refused to testify to the US Congress about the company’s $ 3. 2002: Under Chapter 11 of the Bankruptcy Code in US District Court. and 88. WorldCom was ordered not to sell any of its stocks for the next 70 days from this date. website management. WorldCom also submitted its revised statement to SEC.8 per cent of the total revenues. The businesses attributed to MCI group had significant assets. Bernard Ebbers. and for the year 2000.

By acquiring CompuServe Corp.8 per cent of the total assets.4 billion net worth.5 billion cash and changed its name to WorldCom. the regulatory bodies in the US and Europe objected to it. the largest domestic long distance and international telecommunications services provider in Brazil. 2001. Brooks Fibre Properties ($1. it merged itself with another discount long-distance service company. it was a surprise that it retained its position amongst the top five companies in Fortune rankings for the telecommunications industry published in 2000. WorldCom also acquired ANS Communications Inc. IDB Communications Group Inc. in 2000. all shareholders were approved as shareholders of a single company called WorldCom. and CompuServe ($1. The slide accelerated further after the European and the US regulators blocked the firm’s $129 billion acquisition of Sprint Communications in July 2000.8 1993: LDDS acquired long-distance providers. and dial-up internet access businesses). and acquisition of Brooks Fiber Properties gave control to WorldCom over the state-of-the-art fibre optic networks and other facilities owned by Brooks. In 1999.. WorldCom shareholders approved a recapitalization involving the creation of two separately traded tracking stocks — WCOM (reflecting the performance of WorldCom’s data. HISTORY WorldCom’s history dates back to 1983 when Murray Waldron and William Rector sketched out a plan to create a discount long-distance provider called LDDS (Long-Distance Discount Service). But. from America Online Inc. SkyTel Communications. 1994: LDDS acquired domestic and international communications network. as per the WorldCom Annual Report 2001 and Fortune data on telecommunications industry (1997-2001). in 1992. the telecommunications industry across the globe slowed down and WorldCom group companies found themselves in heavy debt and inefficient in generating enough revenues. wholesale long distance voice and data. its CEO. LDDS became a public company by acquiring Advantage Companies Inc. for approximately $ 500 million. 1998: WorldCom completed three mergers: with MCI Communications ($40 billion) — the largest in history at that time. WorldCom and Sprint had Box 2: Events Leading to Worldcom’s Expansion to terminate their merger agreement. In 1985. and. and 2002 (Tables 3A to 3E. RISE AND FALL OF WORLDCOM The accounting disaster did not happen overnight.2 billion). . In 2000. WCOM and MCIT refer to trading symbols as quoted in Nasdaq National Market. 1996: WorldCom merged with MFS Communications Company which owned local network access facilities via digital fibre to optic cable networks in and around major US and European cities. Exhibit 2). A consolidated historical financial data for the period 1997-2001. as a result. After these mergers. and. in 1999. In 1998. wireless messaging. WorldCom was successful in acquiring another Telecom Company. WorldCom’s acquisitions of Intermedia Communications (worth $ 5. On June 7. internet. one of the early investors. international and commercial voice businesses) and MCIT (reflecting the performance of WorldCom’s consumer. In 1989. Advanced Telecommunications Corp. are given in Exhibit 2. an internet access provider for businesses. When the internet bubble burst early in 2000. In August 1998. published by Fortune in April 1999. But. After recapitalization. After its merger with MCI. and 14. in 1999.. The company grew with a sky-rocketing pace through mergers and acquisitions and. MCI WorldCom became the sixth ranked company in the Fortune telecommunications industry rankings. as against its 11th rank in 1998 rankings. the new company was named as MCI WorldCom. for $2. 1995: LDDS acquired voice and data transmission company. 116 116 WORLDCOM INC.. each share of the existing common stock was changed into one share of the WorldCom group and 1/25 of a share of MCI group stock. in an all-stock deal. Williams Telecommunications Group. MCI WorldCom collaborated with Embratel.the net income. WorldCom got control over one of the most advanced digital networks connecting local markets in the US to more than 280 countries and locations worldwide. WorldCom got control over its interactive and network services. small business. became the CEO of LDDS. The chronology of events given in Box 2 indicates how Ebbers’ strategy of mergers and acquisitions played an important role in expanding the business operations of WorldCom globally and in the US. Exhibit 2). Bernard Ebbers. and UUNet Technologies. WorldCom and Sprint decided to go for merger but. In 2001. After merger with MCI Communications Corp. Resurgens Communications Group and Metromedia Communications.3 billion). Although the company’s stock prices had been in continuous decline since the fourth quarter of 1998 (Tables 2A-2D. it took down many of WorldCom’s biggest customers. Bernard Ebbers was rated as one of the 200 richest Americans with a $1. in a three-way stock and cash transaction that created the fourth largest long-distance network in the US. 2001.

The board agreed to settle Ebbers’ exit with a golden handshake worth $1. S&P and Moody’s Investors Services cut WorldCom’s shortterm and long-term ratings. WorldCom fired Sullivan and declared its intention to discard financial results for the year 2001 and first quarter of 2002 in the official press release. When Ebbers resigned. The US Financial Services Committee had shown its serious concern over the issue of Steve Brabbs. 2002. to take a close look at WorldCom’s books. Further. When Sullivan could not provide an adequate explanation for these transactions. 117 117 . CORPORATE CULTURE AT WORLDCOM WorldCom’s fast-paced growth under the leadership of Ebbers developed an ‘individualistic culture. The culture which was rooted from top to the bottom was that no one should question plans. On June 5. WorldCom secured $1. The company was being run by Ebbers and his close associates such as Scott Sullivan. WorldCom said it would scrap dividend payments and eliminate its two tracking stocks — WCOM (internet and data business) and MCI group (residential long-distance telephone business). the board asked Sullivan and Myers to resign immediately or they would be fired. The media disclosed about the case of Steve Brabbs. On June 20.billion) also came under the probe of Anti-trust division of the US Department of Justice and it was ordered to sell all its assets (worth $ 12 million) related to Intermedia Communications. At that point. In April 2002. 2002. “asset writedowns and other accounting determinations would be made by Andersen officials in the United States. Another top official of WorldCom. about the company’s bookkeeping practices. on June 25. Ebbers resigned on April 30.65 billion bank credit line as it decided to negotiate for a new $ 5 billion funding pact with its lenders. According to the US House Financial Services Committee spokesperson. She found errors in the book-keeping and alerted the WorldCom board. As per the order of the Antitrust Division. Steve was told by David Myers to keep his mouth shut and stop questioning the company’s auditor. Finally. Vice President of Internal Audit. a shivering stock at $ 1. On May 21. the board met for the first time to discuss the issue of Ebbers’s delay in providing collateral for his loans. On May 13. WorldCom disclosed its willingness to exit from the wireless resale business and also to cut down jobs further to reduce expenses and pay massive debts. that made WorldCom’s international figures look better.6 million. the CFO.” Willson said in a separate e-mail exchange. Cynthia Cooper and her internal audit team met VIKALPA • VOLUME 29 • NO 4 • OCTOBER . 2002. WorldCom later admitted that another $3. According to Brabbs.5 billion in new funding to replace a larger $ 2 billion credit line. WorldCom. On May 23. On April 26.’ where loyalty to people was appreciated and rewarded more than the loyalty to the company. two major credit rating agencies. In January 2002.79 as against its mid99 peak of $64. also told Brabbs that he was not following the correct protocol in dealing with issues he raised with Andersen’s British representatives. WorldCom decided to dispose off all assets related to Intermedia operations slowly by the third quarter of 2002. London office.DECEMBER 2004 with the audit committee and disclosed findings of inappropriate ‘line cost transfers’ to capital accounts. and expectations for further weakness. we will work accordingly. That was when Sidgmore took over and asked Cynthia Cooper. it was Steve Brabbs who had found an accounting entry in early 2000 that reduced the company’s line costs by $33. The dissatisfied board asked Ebbers to resign from the company. In March 2002. On May 9. the company was sinking under $28 billion debt. 2002. Vice President (International Finance and Control). SEC launched a probe into how and why WorldCom had loaned Ebbers more than $400 million at the charitable interest rate of 2.5 million a year for life and restructuring of his personal loans. Willson said. John Sidgmore took over as the new CEO. the same day. the media published many stories that revealed how honest people were treated at WorldCom. 2002 and. on May 15. if there is an issue that needs to be addressed. the Controller.3 billion of reserves had been improperly manipulated on its balance sheets and $500 million in income was wrongly booked. Ebbers used these loans to pay off his personal liabilities most of which were secured by his WorldCom stocks.15 per cent. decisions. S&P removed WorldCom from its S&P 500 index. 2002. Mark Willson. Myers resigned but Sullivan did not. 2002. After the bankruptcy disaster. 2002. 2002. Arthur Andersen. and actions of top bosses. citing the company’s deteriorating operating performance. debt. WorldCom disclosed that it would draw down a $ 2. and David Myers. Moody’s cut WorldCom’s long-term ratings to junk status. Peggy Peterson.50. WorldCom was unconsciously moving on the path of a disaster.” “All of this information needs to be properly communicated between the UK AA and the US AA.

Ebbers was also described by the media as a risk-seeking. Ebbers orchestrated mergers with 75 companies including the biggest one with MCI. Our goal is to be the No.3 billion of accruals mostly at the direct request of Sullivan or Myers. Director. most of the employees felt that they did not have any outlet for expressing concerns about the company’s policy and behaviour. 118 118 . It was only he who designed strategies to keep WorldCom’s revenue growth in doubledigits as expected by Ebbers. At the age of 37. In 1995. the Audit Committee. ROLES OF VARIOUS STAKEHOLDERS Role of CEO Bernard Ebbers. He instructed David Myers. In 2001. Ebbers was quoted by Fortune. at his request. bonus. although not the founder of WorldCom.At WorldCom. To understand relationships among various people in the company. About his success. Moore also added that the evidence “showed that it was Bernie Ebbers who asked those employees to write those cheques. Ebbers financed many of these businesses by commercial bank loans secured by his personal WorldCom stock. a partial organizational structure is given in Exhibit 3. Ebbers’ employees made a series of $200 campaign contributions to a local politician and were illegally reimbursed by the company. he was earning $19. Mike Moore. he received margin calls from his bankers and. General Accounting. Kim Emigh. CEO of AT&T. an operating marina. by April 2002. etc. Steve Brabbs was not alone. Cooper decided to go ahead alone with her team and put her views before Sullivan. and capitalization of line costs in 2001 and 2002.” Ebbers was a firm believer of the notion that continuing revenue growth was crucial to increasing WorldCom’s stock prices so that stock could be used as currency for corporate expansion through acquisitions. Mississippi Attorney General. But. was the major force behind the transformation of a small company LDDS into a global telecom giant — WorldCom. In an interview to Time magazine in July 2002. Budget and Financial Analyst at WorldCom also witnessed first-hand the anger of executives when he questioned WorldCom’s practices. 1 stock on Wall Street. Ebbers jokingly told Time reporter in 1997.” Role of CFO Besides Ebbers. in September 2000. Sullivan was also awarded the CFO Excellence Award by the CFO magazine in 1998. a luxury yacht building company. Over a seven-quarter period between 1999 and 2000. said that his office investigated Ebbers when WorldCom was an upstart known as LDDS and had found him playing loose with the rules. a trucking company. “Our goal is not to capture market share or be global. a country club. real estate ventures. and a minor league hockey club. over-zealous deal-maker whose accomplishments gained him tremendous respect. and investor relations departments by special rewards. incentives. these personal loans swelled up to $ 408 million and became the main cause of Ebbers’s exit from WorldCom. and the external auditor (Arthur Andersen) on several occasions. Ebbers and his close associates were so self-indulgent that they failed to see the impact of their practices on people’s behaviour and corporate culture at WorldCom. especially in finance. to handle any resistance from other managers in relation to these tasks. “the thing that helped me personally is that I don’t understand a lot of what goes on in this industry. a Canadian cattle ranch. The company’s HR department never objected to such special rewards. Ebbers was at the top of Fortune’s list of ‘People to Watch 2001. Ebbers had been under scrutiny of the SEC and the US government departments because of his mergers and takeover strategy for a long time. accounting. Sullivan and his staff used two main accounting tactics: accrual releases in 1999 and 2000. WorldCom released $ 3. WorldCom pleaded guilty to a felony charge and paid a $1. Controller and Buford Yates. freespending. Sullivan asked Myers to restrict the scope of inquiry being done by Cooper. another employee. Sullivan assured WORLDCOM INC.’ along with Mike Armstrong. the other person who enjoyed the attention of media was the CFO of WorldCom. Later. Scott Sullivan.” Ebbers also had some other personal businesses besides his full-time job as the CEO of WorldCom that included hotels. When these stocks started declining in 2000. But. the Compensation Committee approved loans and guarantees from WorldCom to stop Ebbers from selling his WorldCom stock to pay his bank loans. timberlands.20. In 1997. a rice farm. During his tenure from 1985 to 2002. Even when Cooper started a routine operational audit of WorldCom’s capital expenditures in August 2001. when business started declining in 2000. Sullivan decided to use accounting entries to achieve targeted performance. Ebbers and Sullivan rewarded those employees who had shown loyalty to them by following their instructions and decisions. a lumber mill.3 million a year.000 penalty.

US House Energy and Commerce Committee spokesperson. that a number of middle management people at WorldCom had a very good idea that someone was cooking the books. Despite having its serious concerns over certain accounting entries.3 billion. Betty Vinson. Sullivan and Myers continuously pressurized Vinson and Normand to transfer ‘line costs’ to capital expenditures. the financial position of WorldCom … in conformity with accounting principles generally accepted in the United States. Buford Yates. Management Reporting. Sullivan and Myers failed to justify their decisions and actions before the Audit Committee. 2002 that the balance sheets and income statements “present fairly. International Fixed Costs. Director. Myers chose to resign but Sullivan refused and he was fired by the board from the position of CFO.9 billion of capital expenditure of Operations and Technology Group for the entire network of WorldCom.” In the Audit Committee meeting held on March 6. Sullivan also manipulated the information related to capital expenditures and line costs that were presented to the board. Later. but she could not get a satisfactory explanation from them. Cooper asked for explanation of capital expenditure of $2. it supported these transfers.DECEMBER 2004 bad debt expenses that had been transferred to pump up company earnings. and Troy Normand. 2002. But.’ Between 1999 and 2001. Betty Vinson. On June 11. In August 2001. Cooper along with her team. Andersen considered WorldCom to be its ‘flagship’ and most ‘highly coveted’ client. Cooper put this issue before the Audit Committee.4 billion profit in the year 2001.’ Later.” Role of Internal Auditor Cynthia Cooper joined WorldCom (then LDDS) in 1994 to start the internal audit department. Legal Equity Reporting) that they were not doing anything illegal and he would take full responsibility for their actions. Cooper was chosen by the Time magazine as ‘the Person of the Year 2002’ for her ethical work behaviour. Director. at this. she had become very doubtful about the audit practices adopted by Andersen. To verify the company’s financial report was. He even directed Cynthia never to use the word ‘internal control’ for her department.’ After the Enron scandal. Role of External Auditors Arthur Andersen had been WorldCom’s independent auditor from 1990 to 2002. the firm’s ‘Crown Jewel. 2002. When Cooper approached Andersen for an explanation. a member 119 119 . absolutely none. Sullivan. At WorldCom. Sullivan instructed Myers to restrict the scope of Cooper’s inquiry. Arthur Andersen. the Andersen audit team on WorldCom ignored its own assessment and rated WorldCom as a ‘moderate risk’ client. It’s clear to us that they tried to get to the bottom of it only to be rebuffed by Scott Sullivan. Her arguments forced Myers to admit ‘inappropriate accounting entries in company records. Judith Areen. Cooper met Sullivan who asked her to delay the capital expenditure audit until the third quarter of 2002. Ken Johnson. Stephanie Scott. Later. in all material respects. the remaining amount was attributed to line costs. and Mark Wilson instructed WorldCom staff about what information could or could not be shared with Andersen. Andersen reported in the audit committee meeting on February 6. the head of the Wireless Business Unit complained to Cooper about a $ 400 million accrual in his business for expected future cash payments and VIKALPA • VOLUME 29 • NO 4 • OCTOBER . her team disclosed before the Audit Committee how Sullivan’s ‘line cost’ tactics converted $662 million loss into $2. Cooper decided to go ahead with her team members on inquiring ‘suspicious accounting entries in the company records. and lease buyouts. They were asked to prepare special monthly reports for Andersen. Ebbers and his team had little interest in this type of internal control. but she got explanation only for $ 174 million. Cooper refused to comply with his request. Andersen identified WorldCom as a ‘high risk’ client because of volatility in the telecom industry.3 billion as against $2. Sullivan became furious and asked her to keep away from such inquiries. and its reliance on high stock price for acquisitions. 2002. said in a public release on July 12. In May 2002. in fact. In March 2002. Cooper began a routine operational audit of WorldCom’s capital expenditure.people who resisted his tactics (including Timothy Schneberger. the role of Cooper’s department was to handle operational audits which set company budget standards and evaluate performance. David Myers. met the heads of Audit Committee. corporate accruals. The board asked them to resign. On this issue. Director.”There is no question. and David Myers. About the role of Scott Sullivan. the concern of the independent auditor. Cooper’s team revealed that the corporate had capital expenditure of $2. the company’s active mergers and acquisition plans.

“If Andersen had to prepare WorldCom’s financial statements again.” It did not establish processes to encourage employees to contact outside directors about any concerns they might have had about accounting entries or operational matters. The audit committee reported. The board also oversaw Andersen’s comments over the company’s accounting entries in its audit committee meetings held on February 6 and March 6. among others.350 from April 1996 to March 2002 according to the documents. non-executive members comprised more than 50 per cent of WorldCom’s Board of Directors.400 shares to about four WorldCom officers and directors starting in late 1997. Juno Online Services Inc. Regarding accounting problems. 1999 debut offered at $21 and rose as high as $64 that day. 2002). and 10. Salomon Brothers. The board took an active role for the first time in November 2000 when it came to know about Ebbers’s request to grant him low-interest loans for paying off his personal liabilities but the compensation committee passed Ebbers’s proposal. if ever. Role of Investment Bankers In another disclosure on Monday. would they be prepared in the same way?” Kenny Avery. and TyCom Inc. Role of the Board Between 1999 and 2002. Salomon Smith Barney and its telecom analyst. “There were no significant changes in accounting policies in the current year… no significant or unusual transactions or material transactions in controversial or emerging areas for which there is lack of authoritative guidance or consensus..000 of Rhythms. He was fired on June 25.80. the WorldCom’s Board was “distant and detached from the working of the company.300 shares in nine IPOs for $6. Citigroup. finance. officers or directors of companies acquired by WorldCom and included experts of law. former CFO. According to the investigative committee. who used to deal with WorldCom. asked a question. the board took an active stance only when Cynthia Cooper disclosed her findings to the board in May 2002. getting 8. 120 120 . The data surrendered by Salomon’s parent. according to documents released by the US House Financial Services Committee. including 2. Jr. Salomon Smith Barney.000 of Williams Communications. Grubman was a star telecom analyst at Salomon Smith Barney and he was paid $ 20 million a year for covering the stocks of companies like WorldCom that sent billions of dollars in investment banking business to Salomon. Grubman also came under the scrutiny of US House Financial Committee for his deep involvement with WorldCom. Scott Sullivan. Ebbers also bought shares in several firms that went bankrupt later.05. the firm said in a letter to a US House of Representatives Committee. Scott Sullivan.500 shares.000 shares of Qwest. current WorldCom Chairman. Williams Communications Group. did not include information of when. In the late 1990s through early 2000. UPS jumped by 30 per cent to $65 from its initial price of $50. and current Board Director Stiles Kellett.of the WorldCom Audit Committee. technology IPOs were almost guaranteed to skyrocket in the open market meaning that investors who got in at their offer prices would be likely to reap risk-free gains. and Metromedia Fiber Net as well as in other companies like UPS. Scott Sullivan. along with John Sidgmore. Bernard Ebbers. Although Bert Roberts. Its predecessor company. 2. Those who purchased shares included the former CEO. including KPNQwest.000 shares for about $17 million in 21 IPOs. 2002 for his role in the accounting scandal. August 26. replied ‘Yes’ (Bobbit. Andersen representative. his role was more of an honorary nature. 2002. to other industries like United Parcel Service (UPS) and Kraft Foods. Grubman was also subpoenaed by the US House Financial Committee Chairman. former CEO of MCI. The company’s former CFO. Rhythms soared more than 200 per cent in its April 6. They received shares in offerings ranging from Rhythms NetConnections. allocated on average 6. This share allotment story raises a big question mark about the role of Citigroup unit. Bert Roberts. and his wife Carla bought 32. Angry investors who had invested millions of WORLDCOM INC. Teligent. Jack Grubman. Citigroup stated that its investment banking unit. Qwest Communications International. and telecom industry. He was also charged of advising Ebbers on his takeover strategy. 2002.000 of Kraft. had allocated an average of 1. All these companies later went bankrupt. Most of the board members were former owners. Mike Oxley. and Bernard Ebbers to July 8. was the chairman from 1998 to 2002. between June 1996 and August 2000. and rival long-distance telephone carrier. the shares were sold and for how much.69. The shares bought included 7. Exhibit 4 gives detailed information about board members and board committees.. Amongst executives who were allotted shares. 2002 hearing.01. Ebbers was the biggest recipient.

is unique to the US Bankruptcy Code and provides the debtor a vehicle for operating its business under protection from its creditors while developing a plan for resolving its financial problems. Chapter 7 merely provides a method to liquidate and distribute its assets.090 8. bankruptcy implies termination of operations without restructuring. Under Chapter 7 of the US Bankruptcy Code. (the time period granted under chapter 11 of US Bankruptcy Code). an interim trustee is appointed to administer the debtor’s estate.43) (1.35) (1. a plan may be confirmed even if some (but not all) classes do not accept the plan. Chapter 11. Exhibit 2: Overview of WorldCom’s Financial Data and its Position in the Telecommunications Industry Table 1: Consolidated Historical Financial Data for the Year Ended December 31 (US$ million except per share data) 1997 Operating Results Revenues Operating income (loss) Income (loss) before cumulative effect of accounting change and extraordinary items Cumulative effect of accounting change Extraordinary items Net income (loss) applicable to common shareholders Earnings (Loss) per Common Share Income(loss) before cumulative effect of accounting change and extraordinary items Basic Diluted Net income (loss) Basic Diluted 7.35) (1.153 4238 (85) 4088 2001 35. For a corporate debtor. If accepted by the requisite majorities of each class of affected creditors and equity owners and confirmed by the Bankruptcy Court. Upon approval of a Chapter 11 plan by the court and after consummation of proposed transactions and payments in the plan.worldcom.10 0.dollars on WorldCom stock on the basis of Grubman’s ratings and lost their money filed lawsuits against him and Citigroup questioning the integrity of his research. A Chapter 7 petition is very similar to the concept of ‘filing for bankruptcy’ in non-US countries.767) 1999 35.40 1.888 4.’ As on July 21.617 (942) (2. a Chapter 11 plan is a contract among the parties in interest in the debtor’s Chapter 11 case. Source: www. the debtor is able to have a plan of reorganization confirmed that enables the debtor to operate successfully in the future free from the burdens that precipitated its Chapter 11 filing.10 0. Chapter 11 provides our US entities the ability to restructure and shore up its financial arrangements. 2002. however.43 1. as such it is business as usual for these non-US entities. There is not a Chapter 11-equivalent for corporations outside the US.10 0. Promptly upon the filing of a Chapter 7 petition.560) (36) (129) (2. Later. Outside the US. VIKALPA • VOLUME 29 • NO 4 • OCTOBER . In reality. the CEO.DECEMBER 2004 121 121 .43) 1.46 1.40 1.643 982 185 — (3) 143 1998 17.514 1. In certain circumstances. In a successful Chapter 11 case. on the other hand.40 — — — — Contd.384 0. John Sidgmore had a challenge to start the recovery process so that the company might emerge from bankruptcy after one year Exhibit 1: A Note on Chapter 11 Even today. Pre-Chapter 11 claims are paid at the conclusion of the Chapter 11 case in accordance with the plan of reorganization that will be voted upon and subsequently approved by the court. The filing does not affect petitioner company’s operations outside of the US.09 (1. the conventional meaning of the term ‘bankruptcy’ does not apply to Chapter 11.com/restructuringinformationdesk. There are clear differences between the definitions of bankruptcy in the US and overseas. He needed to address the following concerns: • • • What went wrong with WorldCom? Who were the people responsible for the debacle of WorldCom? Could it have been avoided? What are the major challenges before the company now and what should be done to recover from the organizational disaster? • • • • • Chapter 11 of the Bankruptcy Code is often used by a company that has a fundamentally strong business and loyal customer base to restructure its financial position and debts to strategically strengthen its businesses. Business will proceed as dictated by respective contracts and agreements.501 1.941 2000 39. the plan is binding on all affected parties even if they did not vote in favour of the plan.43 1. a company can emerge from Chapter 11. the word ‘bankruptcy’ has negative connotations and it is unfortunately true that most people consider Chapter 11 to be just a form of bankruptcy. The plan is usually developed by the company in conjunction with its creditors.179 3. the assets of the debtor are liquidated and the proceeds are distributed to creditors.908 7. The petitioner company is prohibited by bankruptcy law from paying any amounts due for services rendered and goods delivered prior to filing for bankruptcy on the petition date. in August 2002.35 1.35 1.013 3. Grubman resigned from Salomon Smith Barney and the National Association of Security Dealers started investigations on his ‘research. In general.

00 10.00 44.868 2.33 30.88 37.0 100.072 13.87 13.925 91. 2.com).79 High 22.821 2.63 14.0 12/31/98 264.67 46.6 12/31/99 293.67 47.80 — — 103. WorldCom Annual Report.914 30.81 0.400 7.1997 WorldCom group proforma net income per share (1) Basic Diluted MCI group proforma net income (loss) per share (1) Basic and Diluted Dividend declared per MCI group share Weighted average shares Basic Diluted Financial Position Total assets Long-term debt Subsidiary trust and other mandatorily redeemable preferable securities Shareholders’ investment Table 2A: Year 1996 1997 1998 1999 2000 2001 1998 1999 2000 2001 — — — — 1.10 15.52 — 2.20 21.087 — — — — 1.00 21.70 18.696 798 55.092 16.933 1.59 60.50 61.516 24.930 (US$) Performance of WorldCom Common Stock Before June 7.48 (0. 2001 Year Third quarter (Starting June 7.29 64.88 0. 1999.25 Second Quarter High Low 27.97 32.25 Third Quarter High Low 28.50 17.2 241.0 167.92 62.88 17.50 47.92 49.50 26.02 11.75 53.0 100.52 21. Table 2D: Performance of MCI Group Stock 06/08/01 WorldCom—MCI S&P 500 stocks Nasdaq telecommunications stocks SIC 4800-4899 US and foreign group stock 100.038 1.6 122.92 25.78 14. 2001) WCOM Group Stock High Low 18.409 0.20) 1.00 23.6 88.22 15.80 26.worldcom.00 28.811 — 14.44 21.470 1.0 12/31/00 77.90 (US$) Third quarter 2001 Fourth quarter 2001 Table 2C: Performance of WorldCom Group Stock for the Period 1996-2001 12/30/96 WorldCom—WorldCom group stock S&P 500 stocks Nasdaq telecommunications stocks SIC 4800-4899 US and foreign 100. WorldCom Proxy Statement April 2002 (available at www.50 (US$) MCIT Group Stock Table 2B: Performance of WorldCom Common Stock After June 7.88 29.40 Low 15.00 40. 2001 First Quarter High Low 23.448 798 45.25 - Fourth Quarter High Low 26.238 0.933 87.0 12/31/01 76.5 208.1 76.30 29.0 12/31/97 111.75 38.04 13.8 190.5 146.72 32.241 0.903 17.83 55.97 18.9 (US$) Sources: 1.20 27.0 100. 122 .32 — 2.06 13. 122 WORLDCOM INC.50 11.30 21.5 431.6 12/31/01 81.128 798 51. 2001.993 57.48 0.90 16.50 16.6 172.54 35.9 Note: These figures refer to cumulative shareholder returns indexed with the Centre for Research in Security Prices or CRSP.6 133.0 183.13 39.0 100.27 11.31 27.912 98.88 50.

500 (6) (29) (10) (6) (91) (15) (9) 6) (2) 0) 1 2 3 4 5 6 7 8 9 10 Verizon Communications AT&T SBC Communications WorldCom Sprint BellSouth Qwest Communications Comcast Alltel Nextel Communications (B) Year 2000 (Fortune.606 415 1.600 58.000 83.000 145.154 17.714 6 95 4 5 4 18 323 32 12 72 Profits $Million % Change from 1999 4.142 45.797 7.574 4 (10) (11) (10) 10 (8) 19 18 8 N/A Profits $Million 389 7.067 -898 % Change from 2000 (97) 65 (9) (64) (1.120 33. April 12.508 % Change from 1997 38 21 173 (22) 8 (796) 57 (56) Employees Number % Change from 1997 107.179 26.800 204. April 17.100 66.428 8.351 1 5 16 10 12 140 7 15 (3) Profits $Million 6.000 117.DECEMBER 2004 123 123 .010) 609 1.242 1.607) (39) N/A (70) (45) N/A Employees Number % Change from 2000 247.306 37.552 90.415 100.669 11.984 35. 2002) Rank Company Revenues $Million % Change from 2000 67.448 (935) 1.000 96.489 37.159 4.772 24.900 54.674 7.965 4.700 37 58 0 4 (17) 9 20 7 14 51 1 2 3 4 5 6 7 8 9 10 AT&T SBC Communications MCI WorldCom Bell Atlantic GTE BellSouth Sprint US West Alltel Comcast (D) Year 1998 (Fortune.908 35.336 25.022 1.552 215.530 77.220 93 (81) 2.678 17.955 19.398 2.610 8.257 16.000 27.439 129.066 % Change from 1998 (46) 103 42 86 (2) (326) (11) 49 10 Employees Number % Change from 1998 147.600 263.153 4.527 (2.391 49. April 26.483 32.182 6.033 3.525 74.000 88.000 (16) (0) 10 5 9 245 (5) 27 (9) 1 2 3 4 5 6 7 8 9 10 AT&T Bell Atlantic SBC Communications GTE BellSouth MCI WorldCom Ameritech Sprint US West Tele Communications VIKALPA • VOLUME 29 • NO 4 • OCTOBER .224 19.013 4.067 5.440 25.123 17.Table 3: Fortune Data on Telecommunications Industry from 1997-2001 (Top Ten Companies) (A) Year 2001 (Fortune.850 120.669) 3.000 70.134 12.420 85.090 26.174 25.743 9.172 3.566 28.700 87.981 64.401) 2.875 61.476 39.190 59.378 7.613 16. 2000) Company Revenues $Million % Change from 1998 62.200 77.930 13.450 70.599 7.209 16 72 110 5 (1) 9 16 6 21 11 Profits $Million 3. 2001) Rank Company Revenues $Million % Change from 1999 65.508 1.800 193.000 103.342 784 1.707 51.570 (4.202 4.000 12 81 5 17 8 8 570 36 12 24 1 2 3 4 5 6 7 8 9 10 AT&T Verizon Communications SBC Communications WorldCom BellSouth Sprint Qwest Communications COMCAST Alltel Nextel Communications (C) Rank Year 1999 (Fortune.715 7.151 23.473 23.588 31.777 25.130 19.501 (1.219 7.071 24.967 4.000 23.023 2.929 (815) 36 181 (2) 3 22 (118) 90 146 Employees Number % Change from 1999 165.800 140. April 16.302 6. 1999) Rank Company Revenues $Million % Change from 1997 53.918 84.

856 23.998 15. 1998) Rank Company Revenues $Million % Change from 1996 52.000 141.359 67. A.000 N.300 2 125 92 12 (0) 7 12 (3) 6 56 1 2 3 4 5 6 7 8 9 10 11 AT&T Bell Atlantic SBC Communications GTE BellSouth MCI Communications Ameritech US WEST Sprint Tele Communications WorldCom Exhibit 3: Partial Organization Chart of WorldCom (As on June 25.461 51.653 15.194 24.352 14.570 7351 (29) 131 79 9 8 6 7 19 4 (6) 64 Profits $Million 4638 2455 1474 2794 3261 2 2296 697 953 (626) 384 % Change from 1996 (21) 30 (30) (0) 14 (100) 8 (41) (20) (325) Employees Number % Change from 1996 128. 20.261 30. April 27.340 114. 2002) Source: Adapted from cases titled “Accounting Fraud at WorldCom” and “Behind Closed Doors at WorldCom: 2001. .” 124 124 WORLDCOM INC.(E) Year 1997 (Fortune.000 59.260 20.874 7.359 81.000 118.000 74.561 19.

From 1992 until September 1998. principal occupation. has been the Chief Operating Officer of the WorldCom group since December 2000. from August 1996 until December 1996. from April 1993 until it was merged with Brooks Fiber Properties in January 1996. telecommunications and oil and gas exploration and production. he was President of WorldCom Network Services. 53. He was President and Chief Operating Officer of MFS Communications Company. each individual has held his or her present position for at least five years. He is a director of Digex. He is a director of MicroStrategy Incorporated. a nominee..Exhibit 4: Information about Nominees and Executive Officers in the Board of WorldCom (As per Annual Meeting Proxy Statement released on April 22. 51. Inc. Network Telephone. Mr Bobbitt is currently a director of Verso Technologies. David Lipscomb University. 40.. Ms Areen has been Executive Vice-President for Law Center Affairs and Dean of the Law Center. has been a director of WorldCom since 1992. He is a director of Digex.. VAALCO Energy Inc. 71. Mr Beaumont served as the President and Chief Executive Officer of WorldCom’s Operations and Technology unit. he has been self employed as a financial administrator. CAPCure and Digex and is on the Board of Trustees at Johns Hopkins University. Inc. from May 1983 to June 1992.com VIKALPA • VOLUME 29 • NO 4 • OCTOBER .. Mr Aycock served as Secretary of WorldCom from 1987 to 1995 and was the Secretary and Chief Financial Officer of Master Corporation. a nominee. He serves as a director of Keystone Property Trust.. has been a director of WorldCom since March 1998. Xspedius. Inc. has been President and Chief Executive Officer of WorldCom since April 1985. 57. Francesco Galesi.. a nominee.. Mr Kellett has been Chairman of Kellett Investment Corp. Max E Bobbitt. Board of Directors Independent Public Accountants: KPMG LLP As per annual meeting proxy statement released on April 22. 59. Mr Tucker served as a director of WorldCom from May 1995 until November 1. since 1976. Inc. and Digex. Ltd. His compensation as an advisory director is the same as that of a director. a nominee. Spacehab. and Secretary of WorldCom since December 1994. a nominee. Treasurer. Xspedius. a nominee. Judith Areen.. Masergy. Incorporated. has been a director of WorldCom since September 1998. He was Chief Executive Officer of MCI from December 1991 to November 1996.com. a venture capital fund specializing in the telecommunications industry. Unless indicated otherwise. and Metromedia China Corporation. he was President and Chief Executive Officer of Asian American Telecommunications Corporation which was acquired by Metromedia China Corporation in February 1997. 73. which includes companies engaged in real estate. a nominee. 2002. MedImmune. 2002) The following information pertains to each director or nominee’s and each executive officer’s age. From December 1996 to September 1998. a subsidiary of MCI. Mr Sullivan has served as Chief Financial Officer. Inc. Inc. Bernard J Ebbers.. He is a director of Digex from November 1. Inc. Georgetown University. he was Chairman of the Hambrecht and Quist Group. since 1979 and currently serves as a member of the Steering Committee of the firm’s partnership. where he was employed from 1950 through 1970. has been a director of WorldCom since September 1998. Lawrence C Tucker. Georgetown University. He is a director of the News Corporation Limited. Air2web. White Mountains Insurance Group. (Chairman) • Max E Bobbitt • Gordon S Macklin • Lawrence C Tucker Audit Committee • Max E Bobbitt. John W Sidgmore. He serves as a director of Completel LLC. a nominee. Inc. a motel management and ownership company. as the case may be. Mr Allen is currently an investment director and member of the general partner of Meritage Private Equity Fund. people holding important portfolios in the Board of Directors were: • John W Sidgmore: President and Chief Executive Officer • Scott D Sullivan: Executive Vice-President and Chief Financial Officer • Ronald R Beaumont: Chief Operating Officer (WorldCom and MCI group operations) • Bert C Roberts: Chairman. Mr Sidgmore served as Chief Operations Officer of WorldCom. 58. He has been a general partner of Brown Brothers Harriman & Co. 53. a nominee. He is the former Vice-Chairman and Chief Executive Officer of Brooks Fiber Properties where he served in such capacities from 1993 until its merger with WorldCom in January 1998. From March 1997 until July 1998.DECEMBER 2004 also served as Chairman of the National Clearing Corporation (1970 . He Source: www. Inc. Inc.. Previously. 2000. Mr Roberts served as Chairman of the Board of MCI Communications Corporation or MCI. He is also a director of Riverwood Holding. (Chairman) • James C Allen • Judith Areen • Francesco Galesi Independent Public Accountants: Arthur Andersen LLP As per supplement to proxy statement released on May 20. Inc. a nominee. 2000. a founder of Brooks Fiber Properties. He served as President and Chief Operating Officer of Brooks Telecommunications Corporation.1975) and as a partner and member of the Executive Committee of McDonald & Company Securities.. present position with. Inc. and the year in which each director was first elected a director (each serving continuously since first elected except as set forth otherwise). Z-Tel Technologies. Subsequent to 1992. he served as President and Chief Executive Officer of Metromedia China Corporation. has been a director of WorldCom since 1983. from 1970 through 1987. and President of UUNET from June 1994 to August 1996 and from January 1997 to September 1997. National Healthcare Corporation. has been the Vice-Chairman of the Board and a director of WorldCom since December 1996. became an advisory director of WorldCom. from June 1994 until October 1998. Ronald R Beaumont. 60.. trustee or managing general partner. a private banking firm. has been a director of WorldCom since 1996. Inc. 57. From July 1998 to the present. From January 1996 until March 1997. a nominee..worldcom.. an investment banking and venture capital firm. of 48 of the investment companies in the Franklin Templeton Group of Funds. 2002. Mr Macklin has been a corporate financial advisor since 1992. Inc. since 1989. Mr Galesi is the Chairman and Chief Executive Officer of the Galesi Group. since 1995. Mr Ebbers has served as a director of WorldCom since 1983. He was Chief Executive Officer of UUNET Technologies. He serves on the boards of Martek Biosciences Corporation.. and Family Dynamics Institute. Stiles A Kellett. Jr. He was President and Chief Operating Officer of MCI from October 1985 to June 1992 and President of MCI Telecommunications Corporation. Valence Technology. Scott D Sullivan. James C Allen. and director. 125 125 . and previously served as a director of WorldCom from May 28. he has been a telecommunications consultant. has been a director of WorldCom since 1992. From 1987 through 1992. Carl J Aycock. Bert C Roberts. who is an executive officer but not a nominee. US Unwired. From December 1996 to 1998. has served as a director of WorldCom since 1981. Jr. Jr. 1992 until December 1992. 55. Gordon S Macklin. Overstock. a subsidiary of WorldCom. and Virtual Bank. Inc.. has been the Chairman of the Board and a director of WorldCom since September 1998. He serves as a director of Netzee. he was President of the National Association of Securities Dealers. Compensation and Stock Option Committee • Stiles A Kellett. From 1998 to December 2000. She has been a Professor of Law. from 1989 until 1992. 59. or Digex.

Zekany. (www. D R. organizational transformation. G (2002). “Why Companies Fail.com). MICA. February. etc. August 28. Minutes of the Regular Meeting of the Audit Committee of the Board of Directors of WorldCom Inc. July 12. available on Worldcom website. Acknowledgement • The authors sincerely acknowledge Prof Sridhar Chari. His current areas of interests are stress mana- gement. L W and Warder. com. Official website of US Security and Exchange Com. Bangalore for their valuable comments and suggestions in developing and modifying this case. “Fortune 500 Ratings 2001. organizational culture.ac. “Chronology of WorldCom Death Foretold. Ahmedabad (MICA) as Assistant Professor in Organizational Behaviour area. Satish C Pandey is currently working with Mudra Institute of Communications.” The Economic Times.” Reuters. 50-58. “The Night Detective. 115). March 6 (as cited in “Behind Closed Doors at WorldCom:2001. Visiting Professor (Finance). D (2004). The Economic Times. indiatimes. Admits Citigroup. 2002. M (2002). Dollar Plunges” and “Another Scam: WorldCom Owns Up To $ 4-bn Fraud. Kadlec. “Fortune 500 Ratings 2001.” Time. (www.reuters. April 17.economictimes. R.” The Economic Times. S (2002). Gandhi Labour Institute. April 15. C B Jr (2003). IIM. main resource for news items available on The Times of India and The Economic Time” also). Z T (2004).com) “Why WorldCom will Thrive. “WorldCom Aftershock: Markets Go into a Tailspin. June 27. March 31.” Fortune. 2002. A (2003). Boston. April 16. available on WorldCom website. indiatimes.” Issues in Accounting Education.. now changed to www. J and Harrington. Ripley. organizational transformation and corporate governance. 126 . “WorldCom Workers told to Keep Quiet. May 16. (available at. July 8. R S and Kiron. Gasparino. Ahmedabad and various other academic bodies as honorary professor. He has published a number of papers in refereed national and international journals. T and Baughn..BIBILIOGRAPHY This case draws extensively from the following sources: Internet Sources Official website of WorldCom Inc. “Salomon’s Grubman Resigns. Useem. personality. Padgett.” Issues in Accounting Education. MICA. Reeves.” The Times of India. A J (2002). “Ex-WorldCom’s Exec Got Big IPO Shares. “Report of Investigation.” Wall Street Journal-240 (34). 2002. August 27. MICA and Dr Rishikesha Krishnan. D. Charan.mission. “WorldCom Exec was Told to Stop Questioning Auditors.worldcom. 2002. (for telecommunications industry) “Fortune 500 Ratings 1999. Katzenbach. 2002. E.” HBR Case 9-104-971. 19 (1). He is currently associated with Idea Foundation. “Behind Closed Doors at WorldCom:2001. He has published papers on topics like stress management. MA: Harvard Business School Publishing. Published Sources Beresford.” The Economic Times.in Pramod Verma is a retired professor from Indian Institute of Management. 2002.com). Professor (Marketing Management) and Director.” Fortune (Asia).D.” Time. Bobbit. in Psychology from Gurukul Kangri Vishwavidyalaya. learning organizations.” The Economic Times. Prof Atul Tandan. Assistant Professor (Marketing Management). May 13. and corporate governance. 2002. e-mail: satish@mica. “Fortune 500 Ratings 2000.. Ahmedabad.” Special Investigative Committee of Board of Directors of WorldCom Inc. for legal documents related to the WorldCom bankruptcy filing. The Reuters. July 22.” Fortune. “Accounting Fraud at WorldCom. A (2002). N deB and Rogers. Braun. Kaplan. UK.sec. 54-55. The Times of India.” The Economic Times. February. He had been associated with Personnel Management and Industrial Relations area at IIMA. August 28. April 27. April 26. “WorldCom: The Fall of a Telecom Titan. Dr Seema Gupta. “WorldCom Brass Got IPO Shares Free.gov). Haridwar. personality. NASD Finds ‘Spinning’ at Firm. D (2002). His areas of interests are human resource management. June 27.timesofindia. (www. 2002. “More at WorldCom Knew of Accounting Issue: US Panel. He is a Ph.” Time. K. He is a Ph. 126 WORLDCOM INC. in Economics from University of Manchester.” Fortune. “The Rise and Fall of Bernie Ebbers.” Fort Worth Weekly Online. May 27. “Accounting for Anguish. C and Craig. “Top WorldCom Events from 1983 to Present.com.” a Published Document for the General Public. (available at www.mci.” The Economic Times. 44-49. Professor (Corporate Strategy). August 28.” Fortune. December –January.” Fortune. organizational learning. “Fortune 500 Ratings 1998. 2002. WorldCom Annual Report 2001. www.

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