What did WorldCom say?

The company said an internal audit had discovered that $3.3bn in profits were
improperly recorded on its books from 1999 to the first quarter of 2002. That
is on top of the $3.8bn in expenses the company said it had improperly
reported as capital investments. WorldCom now says it must issue revised
financial statements for 2000 and 1999 as well. The revision will reduce 2000
profits by more than $3.2bn, but this may not be the end of accounting
horrors as the company warned it may find more problems.

Is there a new twist to the latest disclosures?

WorldCom said most of the $3.3bn irregularity involved the manipulation of
reserves. Companies set aside reserves to cover estimated losses such as
uncollected payments from customers and judgements in lawsuits and other
expected costs.

Are reserves normal business practice?

It is a perfectly legitimate practice, like setting aside funds for a rainy day. But
reserves can be abused to create the accounting equivalent of a slush fund. If a
company wanted to massage profits to meet Wall Street expectations it can
transfer the necessary sums from the reserve. The suspicion is that WorldCom
deliberately inflated its reserves to be able to dip into them to boost profits in
order to meet profit projections.

Who is to blame?
WorldCom's chief executive, John Sidgmore, blamed the company's former
chief financial officer, Scott Sullivan, and the former controller, David Myers.
The two were fired for claiming $3.8bn in regular expenses as capital
investment in 2001. The pair were arrested in New York, handcuffed and
paraded in front of TV cameras as part of the Bush's administration
crackdown on corporate crime. Charged with securities fraud, conspiracy and
other charges, they face 65 years in prison. WorldCom's founder and former
chief executive, Bernie Ebbers, says he was unaware of the accounting
problems, and has not been charged.

What is wrong with filing expenses as investment?

Operating expenses must be subtracted from revenue immediately, while the
cost of capital expenses can be spread over time. Improperly spreading
operating costs inflated WorldCom's profits.

Why did WorldCom's accountants not spot the problem?

WorldCom's accountants at the time were Arthur Andersen, the same people
that looked after Enron's books as well as other companies hit by accounting
issues - Tyco, Global Crossing and Adelphia. Andersen accused Mr. Sullivan of
withholding information from them. The deputy US attorney general, Larry
Thompson, said: "We have to ask where the professionals were, the
accountants and the lawyers."

What is being done to get a proper accounting?

WorldCom has new accountants, KPMG, who have been asked to scour the
books back to 1999. It will be virtually impossible to get an accurate picture
until a comprehensive audit for the past several years is done, a process
expected to last months. The company is also under investigation by the
department of justice and the securities and exchange commission, the US
financial regulator. WorldCom, which has been charged with fraud for
allegedly hiding $1.2bn in losses, is now under bankruptcy protection.

Any other bad news?

WorldCom said it may have to write off $50bn when it restates ifs finances.
One of the largest write-offs in corporate history, that would amount to the
2001 gross domestic products of Hungary and the Czech Republic. Only Time
Warner's $54bn write-off was bigger.

The rise and fall of WorldCom

1983 Businessmen Murray Waldron and William Rector sketch out a plan to
create a discount long-distance provider called LDDS (Long-Distance Discount
Service).

1985 Early investor Bernard Ebbers becomes chief executive officer of LDDS.

1989 LDDS becomes public through the acquisition of Advantage Companies.

1992 LDDS merges in an all-stock deal with discount long-distance service

provider Advanced Telecommunications.

1993 LDDS acquires long-distance providers Resurgens Communications

Group and Metromedia Communications in a three-way stock and cash
transaction that creates the fourth-largest long-distance network in the United
States.

1994 LDDS acquires domestic and international communications network IDB

Communications Group in an all-stock deal.

1995 LDDS acquires voice and data transmission company Williams

Telecommunications Group (WilTel) for $2.5 billion cash and changes its name to
WorldCom.

1996 WorldCom merges with MFS Communications Company (MFS), which

owned local network access facilities via digital fiber optic cable networks in and
around major U.S. and European cities, and UUNet Technologies, an Internet
access provider for businesses.

1998 WorldCom completes three mergers: with MCI Communications ($40

billion) the largest in history at that time Brooks Fiber Properties ($1.2 billion)
and CompuServe ($1.3 billion).

1999 WorldCom and Sprint agree to merge. WorldCom shares peak at more
than $64.

2000 U.S. and European regulators block the proposed merger with Sprint;
WorldCom and Sprint terminate their merger agreement.

2001 WorldCom merges with Intermedia Communications, a provider of data

and Internet services to businesses.

2002

March 11 WorldCom receives a request for information from the U.S.

Securities and Exchange Commission relating to accounting procedures and
loans to officers.

April 3 WorldCom says it is cutting 3,700 jobs in the U.S. or 6% of WorldCom

group's staff, 4% of WorldCom's overall work force.

April 22 Standard & Poor's cuts WorldCom's long-term and short-term

corporate credit ratings.

April 23 Moody's Investors Service cuts WorldCom's long-term ratings. Fitch

cuts the company's ratings, saying it expects WorldCom's revenue to deteriorate
during 2002, with prospects for recovery in 2003 uncertain.

April 30 WorldCom CEO Bernard Ebbers resigns amid slumping share prices
and SEC probe of the company's support of his personal loans. Vice Chairman
John Sidgmore takes over.

May 9 Moody's cuts WorldCom's long-term debt ratings to junk status, citing
the company's deteriorating operating performance, debt and expectations for
further weakness.

May 10 Standard & Poor's cuts WorldCom's credit rating to junk status.

May 13 Standard & Poor's removes WorldCom from its S&P 500 Index.

May 15 WorldCom says it would draw down a $2.65 billion bank credit line as it
negotiates for a new $5 billion funding pact with its lenders.

May 21 WorldCom says it will scrap dividend payments and eliminate its two
tracking stocks, one that reflects its main Internet and data business and a second
that reflects its residential long-distance telephone business.
May 23 WorldCom secures $1.5 billion in new funding to replace a larger, $2
billion credit line.

June 5 WorldCom says it will exit the wireless resale business and will cut jobs
to reduce expenses and pare massive debts.

June 25 WorldCom fires its chief financial officer after uncovering improper
accounting of $3.8 billion in expenses over five quarters starting in 2001. The
company also says it will cut 17,000 jobs, or 20% of its work force.

June 26 SEC files civil fraud charges against WorldCom and seeks an order to
prevent the company from disposing of assets, destroying documents and making
extraordinary payments to senior officers. The U.S. Justice Department says it is
probing the matter.

Nasdaq market halts trading in its two tracking stocks, WorldCom Group and MCI
Group. Shares of WorldCom fall as low as 9 cents before the halt.

June 27 The U.S. House Financial Services Committee subpoenas top current
and former WorldCom executives, Ebbers, Sidgmore and Sullivan, as well as
Salomon Smith Barney analyst Jack Grubman to testify on July 8. The House
Energy and Commerce Committee requests documents for its own probe.

July 1 WorldCom says in a sworn statement to the SEC that its audit
committee is reviewing its financial records for 1999 through 2001 regarding
"certain material reversals of reserve accounts." The company receives notice
from some of its lenders saying they could demand immediate repayment for
defaulted loans. The company's shares are resumed on the Nasdaq, opening at
about 8 cents. The Bush administration says it is reviewing existing government
contracts with WorldCom and could deny the company new business.

July 2 Sidgmore holds news conference, apologizing for the scandal and says
WorldCom is working on funding proposals with its lenders to stave off
bankruptcy. New York State comptroller files suit for losses in its pension funds.

July 3 U.S. District Judge Jed Rakoff appoints former SEC Chairman Richard
Breeden to prevent possible shredding of key documents and unwarranted
payouts to top officers. Rakoff sets March 31 for WorldCom to go on trial for
alleged fraud.

July 8 Former WorldCom CEO Ebbers tells the U.S. House Financial Services
Committee he did nothing wrong and refuses to answer questions. Ex-CFO
Sullivan also refuses to testify. Salomon Smith Barney analyst Jack Grubman
says he attended WorldCom board meetings but denied having inside information
about the woes. Sidgmore blames Andersen and says turnaround plans are
coming together, some of which include bankruptcy.

WorldCom says in a revised statement filed with SEC that Sullivan tried to delay
an internal audit that discovered the transfers of expenses to capital spending
accounts.
July 9 Sidgmore says the company expects to decide within three weeks
whether to pursue bankruptcy or some other financial reorganization and is
seeking $3 billion in funding, less than the previously sought $5 billion.

July 10 U.S. attorney in Mississippi is removed from investigation of WorldCom

because of a conflict of interest and case is taken over by New York's U.S.
attorney's office.

July 11 WorldCom says it will not pay the $71 million second quarter dividend
to shareholders of its MCI Group long-distance tracking stock.

July 12 SEC wins a stay blocking WorldCom plans to convert MCI Group
tracking stock into WorldCom stock for 10 business days while the agency
reviews the conversion.

July 15 Rep. Billy Tauzin says Congress interviews of witnesses indicate

WorldCom's accounting errors may go back to 1999 and says company e-mails
show efforts in March 2001 of top executives trying to manipulate earnings to
meet Wall Street expectations. He also says company memos show executives
had discussions in 2000 about accounting for expenses over a longer period of
time than allowed.

July 16 WorldCom lines up $2 billion in financing to keep operating if lenders

force the company into bankruptcy protection, sources say. A lawsuit by 25 banks
trying to limit WorldCom's use of $2.5 billion in loans was moved to federal court
from state court. Three California pension funds sue WorldCom for allegedly
misleading them about the company's financial health in a 2001 bond offering.
WorldCom missed $79 million in interest payments, according to sources. FCC
Chairman Michael Powell says he does not expect imminent service halts or
disruptions by WorldCom.

July 17 The company agrees to freeze some assets for 80 days in exchange
for a temporary halt to legal efforts by a group of banks to recover $2.5 billion in
loans.

July 18 Sources say WorldCom plans to file for bankruptcy protection as early
as July 21.

July 21 WorldCom CEO Sidgmore says the company will file for Chapter 11
bankruptcy protection later in the day, but plans to emerge within 9 to 12 months.
The company will have access to up to $2 billion in funding but does not plan to
tap all of it. Additionally the company will hire a restructuring expert.

When WorldCom, the telecommunications giant, failed and was put into
bankruptcy, the U.S. witnessed one of the largest accounting frauds in
history. Former CEO, Bernie Ebbers, 63, was convicted of orchestrating this
US$11 billion accounting fraud and was sentenced to 25 years in prison on
July 13, 2005.

How could a loss of this magnitude have occured? Where were the checks
and balances? The watchdogs? Specifically, whatever happened to
WorldCom's board of directors, the custodians of this once mighty
corporation? Were they "asleep at the switch?"

While examining this colossal failure in corporate governance and what could
have been done to avoid it, I came across a fascinating document entitled
"Report of Investigation" dated March 31, 2003. This Report was prepared
for, among others, the Federal Bankruptcy Court overseeing WorldCom. A
great deal of my research was obtained from the Report and all of the
quotes below can be directly attributed to the Report.

Accounting Misstatements

WorldCom made major accounting misstatements that hid the increasingly

perilous financial condition of the company. The Report described the
accounting shenanigans as follows: "... As enormous as the fraud was, it was
accomplished in a relatively mundane way: more than $9 billion in false or
unsupported accounting entries were made in WorldCom's financial systems
in order to achieve desired reported financial results ..."

What Drove the Fraud?

The driving factor behind this fraud was the business strategy of WorldCom's
CEO, Bernie Ebbers. In the 1990s, Ebbers was clearly focused on achieving
impressive growth through acquisitions.

How was he going to pay for this acquisition binge? By using the stock of
WorldCom. To accomplish this buying spree, the stock had to continually
increase in value.

Here's a bit of how the Report describes this scenario:

"... WorldCom pursued scores of increasingly large acquisitions. The strategy

reached its apex with WorldCom's acquisition in 1998 of MCI
Communications, a company with more than two-and-a-half times the
revenue of WorldCom. Ebbers' acquisition strategy largely came to an end
by early 2000 when WorldCom was forced to abandon a proposed merger
with Sprint because of antitrust objections ..."

Ebbers felt the need to show ever-increasing revenue and income. His only
recourse to achieve this end was financial gimmickry. The problem is that
the more one resorts to this sort of deception, the more complicated it
becomes to continue it. Deception is just not sustainable in the long run.
Complicating Ebbers' situation was an industry-wide downturn in
telecommunications. During this time, Wall Street had continuing
expectations of double-digit growth for WorldCom. After all, they had
achieved so much in such a relatively short period of time.

However, WorldCom needed time for its management to catch up to its

newly acquired companies and learn how to run and manage them.
Unfortunately, Ebbers did not have the courage to tell Wall Street that
WorldCom needed time for the consolidation and digestion of its acquisitions.
In order to satisfy Wall Street's expectations, Ebbers had to doctor his
company's books.

If he had had the courage to tell them what was really needed, WorldCom
would be alive today and Ebbers wouldn't be facing the prospect of spending
the rest of his life in prison.

Another major factor driving this fraud was Ebbers' very apparent desire to
build and protect his personal financial condition. For this reason, he had to
show continually growing net worth in order to avoid margin calls on his own
WorldCom stock that he had pledged to secure loans.

This Debacle Could Have Been Stopped

It is obvious that the Board of Directors that was in place when WorldCom
was planting the seeds of its destruction could have stepped in and stopped
this financial death spiral.

Although the Report clearly puts a great deal of the blame on Ebbers saying,
"... The fraud was the consequence of the way WorldCom's Chief Executive
Officer, Bernard J. Ebbers, ran the Company ... he was the source of the
culture, as well as much of the pressure, that gave birth to this fraud," the
Board of Directors certainly shares this blame. As the Report states, "... The
setting in which it occurred was marked by a serious corporate governance
failure ..."

The Court-Ordered Fix

The Bankruptcy Court directed the newly constituted Board of Directors and
the newly appointed Corporate Monitor to fix this horrible example of
corporate malfeasance. The Report of Investigation includes
recommendations meant to "... cure the principal failing that gave rise to the
fraud: a lack of effective checks and balances on the power of senior
management ..." Here are a few:
 An active and independent Board of Directors and Committees;
A corporate culture of candor, in which ethical conduct is encouraged
and expected, as exemplified by the ethics pledge that the Company
and the Corporate Monitor have developed and that senior
management has signed;
A corporate culture in which the advice of lawyers is sought and
respected; and
Formalized and well-documented policies and procedures, including a
clear and effective channel through which employees can raise
concerns or report acts of misconduct.

Payoff

Needless to say, Mr Ebbers did not leave empty-handed. He departed with a

golden payoff that would have investors in Europe baying for blood.
WorldCom agreed to pay its founder an annual pension of $1.5m - as well as to
pick up the bill for medical and life insurance for the rest of his life and, in the
event of his death, to pay an annual pension of $750,000 to his wife.

As WorldCom yesterday announced another round of 17,000 redundancies

worldwide, angry employees were faced with little or no payoff.

Mr Ebbers was unavailable for comment yesterday and one employee quipped
that he was probably on his yacht, humourously named Aquasition.

Unfortunately it looks as though the people who invested their money in his
creation will soon be left high and dry.

Facts and figures

The world's largest carrier of internet traffic and America's second largest long-distance phone
company

Operations in more than 65 countries across the globe with a network stretching 93,000 miles.
Provides internet access for more than 100 countries

Owns some of the original pioneering internet firms - UUNET, MCI and CompuServe - who
created the first email services in the late 1970s

More than 80,000 employees worldwide with roughly 6,000 in Britain

Shares reached $64 in 1999. Trading was halted yesterday with the shares at 9 cents each