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WorldCom - A Bunch of Dirty Fraudsters
WorldCom - A Bunch of Dirty Fraudsters
Rotten Fraudsters
WorldCom has set reserves to pay anticipated bills, reflecting estimates of (unpaid) costs associated with
the used of lines and other facilities of outside vendors
In the third quarter of 2000, WorldCom starts to manipulate true line cost expenses by releasing reserves
(reduced 3Q line costs by $828 million, and 4Q line costs by $407 million).
In 1999 and 2000, WorldCom reduced its reported line costs by approximately $3.3 billion through this
fraud.
Sources: WorldComs 6/9/03 8K report to the SEC and Report of Investigation by the Special Investigative Committee of
the Board of Directors of WorldCom, Inc., March 31, 2003
Accounting Fraud #2: Recharacterizing Certain Expenses as
Capital Assets (2001 2002)
Form Filed Reported Line Reported Income Actual Line Actual Income
With the Cost Expenses (before Taxes Cost Expenses (before Taxes
Commission and Minority and Minority
Interests) Interests)
10-Q, 3rd Q. 2000 $3.867 billion $1.736 billion $4.695 billion $908 million
10-K, 2000 $15.462 billion $7.568 billion $16.70 billion $6.33 billion
10-Q, 1st Q. 2001 $4.108 billion $988 million $4.879 billion $217 million
10-Q, 2nd Q. 2001 $3.73 billion $159 million $4.290 billion -$401 million
10-Q, 3rd Q. 2001 $3.745 billion $845 million $4.488 billion $102 million
10-K, 2001 $14.739 billion $2.393 billion $17.754 billion -$622 million
10-Q, 1st Q. 2002 $3.479 billion $240 million $4.297 billion -$578 million
Source: SECURITIES AND EXCHANGE COMMISSION v. WORLDCOM, INC., Civ No. 02-CV-4963 (JSR)
A Bunch of Dirty Liars (cont.)
1000
800
600
400
200
0
-200
-400
-600
-800
1st Qtr
2nd Qtr 3rd Qtr
2001 4th Qtr
2001 2001 1st Qtr
2001 Reported income
2002
Actual income
How Was Fraud Uncovered?
WorldCom was dominated by Messrs. Ebbers (CEO) and Sullivan (CFO) with
virtually no checks or restraints placed on their actions by the Board of Directors
or other Management.
WorldCom Management provided the Companys Directors with extremely
limited information regarding many acquisition transactions. Several multi-billion
dollar acquisitions were approved by the Board of Directors following discussions
that lasted for 30 minutes or less and without the Directors receiving a single piece
of paper regarding the terms or implications of the transactions (e.g. Intermedia -
$6B acquisition, 60 90 min due diligence, 35 min telephone Board meeting)
No evidence of meaningful debt planning. The ability to borrow was facilitated by
massive accounting fraud. In 4 years issued more than $25 billion in debt
securities at complete discretion of Ebbers and Sullivan. Board rubber-stamped
Pricing Committee decisions.
The Compensation and Stock Option Committee approved Company loans of
more than $400million to Mr. Ebbers without initially informing the full Board or
taking appropriate steps to protect the Company (no due diligence of collateral,
use of proceeds).
The Board never questioned non-WorldCom business activities of CEO and
effectively funded those with the company money.
WorldCom: The Poster Child For Corporate Governance Failures
(cont.)
Audit committee had little power, was under funded and understaffed;
concentrated only on operational audit. Also improper oversight by external audit
Arthur Andersen.
Screwed up compensation structure. Decisions single-handedly taken by CEO.
Most Board members also had stock-based compensation.
Board members had poor oversight on corporate strategy. Very little meaningful or
coherent strategic planning at WorldCom. Absence of proper corporate
governance protocols.The Companys approach to acquisitions and significant
outsourcing transactions was ad hoc and opportunistic.
Loyalty of Board was ensured by members whose companies had been acquired
by WorldCom (6 out of 10) and whose personal fortunes through ownership of the
Companys stock had, for a long period of time, been greatly enhanced during
Ebbers leadership of WorldCom.
WorldCom was a company that grew tremendously in both size and complexity in
a relatively short period of time. Its management, systems, internal controls and
other personnel did not keep pace with that growth. WorldCom grew in large part
because the value of its stock rose dramatically.
Source: FIRST AND SECOND INTERIM REPORTS OF DICK THORNBURGH, BANKRUPTCY COURT
EXAMINER, Kirkpatrick & Lockhart LLP, 2002 2003.
Potential Solutions - Actual Steps Taken Following SEC
Investigation:
On April 30, 2002, the Company announced that Mr. Ebbers had resigned as
President, CEO and Director.
KPMG became the Companys independent auditor and accountants effective
May 14, 2002, replacing Arthur Andersen.
In May 2002, the Companys Internal Audit Department began an investigation
concerning the capitalization of line costs.
The Board has terminated jobs of CFO Sullivan and Chief Controller Myers.
Appointed 3 independent directors professionals in financial fraud
investigations.
Potential Solutions Same Recommendations As For Qwest?
Improve Boards
Greater independence
Rotate auditors Corporate
Governance
Improve Management
Integrity and ethics Culture
Correct incentive scheme