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Accounting Fraud at WorldCom

WorldCom Group, a telecommunication company with more than $30 billion


in revenues, $104 billion in assets, and 60,000 employees stunned the world
when it filed for bankruptcy protection on July 21, 2002 under chapter 11 of
the U.S. Bankruptcy Code. The company has overstated its pre-tax income
by at least $7 billion, a deliberate miscalculation which was at that time
largest in history. The company wrote down about $82 billion and the
companys stock once valued $180 billion became nearly worthless. About
seventeen thousand employees lost their jobs and service to WorldComs 20
million retail customers was also jeopardized.
The main player for this whole accounting fraud was the CEO Bernard J.
Ebbers. The company accumulated $1.5 million in debt due to its lack of
technical experience soon after it started and then Ebbers was given the
responsibility to run things. On the hindsight, Ebbers was not the right
person as his background didnt matched with the current jobs role and
moreover he lacked technology experience. The three major bad practice
which he followed were rapid expansion of the company, financial
contrivance and giving a lot of unnecessary incentive to employees. The
company was driven by sort term goals and secured deals which was often
overpriced and soon tried to be full service Telecommunication Company. The
company also struggled to maintain the 42% E/R ratio. Moreover the
company also followed so many accounting practiced which were not in
accordance with GAAP like release of accruals and capitalization of
expenditures. The company totally focused on building revenue and
neglecting all the good practices like a healthy corporate culture, written
rules of conduct etc. I most cases the employees of financial, accounting and
investor relations departments were granted compensation beyond the
companys approved salary and even human resource department never
objected to such special awards.
The other major factors were the little importance given to the internal audit
and legal department which made the internal audit almost powerless and
no transparency was left in the accounting system. The CEO along with many
senior executives had personal debts taken on the stocks of the company.
Although many people sensed that something is going wrong with the
company but most people thought that Sullivan with his whiz kid CFO
reputation will take care of everything. The failure of the telecommunication
industry proved all the strategies wrong. Soon, Cynthia Cooper found out
about all the wrong practices, but was stopped by CFO to report any of
those. WorldCom did not modify its analytic audit approach and the
misconstrued accounting practice continued. Finally on June 20, Cooper and

her internal audit team met in Washington D.C. with the audit committee and
disclosed their findings of inappropriate capitalized expenses. Soon, Sullivan
was fired and Mayers resigned. On June 25, 2002, WorldCom announced that
its profit has been inflated by $3.8 billion over previous five quarters. Trading
of WorldCom stocks was immediately halted and S&P lowered its long term
corporate credit rating.