. WorldCom Inc.

Case Study on the Most

Controversial Fraud in U.S. History
Case Facts
• Started as Long Distance Discount
Services, Inc. (LDDS) began in Hattiesburg,
Mississippi in 1983.
• In 1985 LDDS selected Bernard Ebbers to be
its CEO.
• The company name was changed to LDDS
WorldCom in 1995, and later just WorldCom.
• It was the second largest long distant discount
services in the United States.
• WorldCom went through 65 acquisitions and
mergers during a 7 year period from 1991 to 1997
• Started providing voice telephony service.
• Entered into other markets through acquisitions -
Data and satellite communications - Internet
services - Web hosting

RESPONSIBILITY ZONE
• CEO, Bernard Ebber
• CFO, Mr. Scott Sullivan,
• Internal auditor, Cynthia Cooper,
• Auditor, Arthur Andersen.
ISSUES
FRAUD COMMITTED:

Company capitalized some revenue

expenditure and showed it as capital assets
in the Balance Sheet. Violating the principles
of GAAP (Generally Accepted Accounting
Principles) company created worthless
assets.
Other issues to be discussed to understand
motivations in commiting fraud:

• Internal Enviroment and Corporate Culture

1. Lack of strategic planning
2. Lack of ethical code of conduct and lack of
integration of accounting systems
3. Lack of outlet for concern

• Top management
1. Ebbers’ individualistic culture and greed for
personal net worth
2. Board of directors’ lack of independence
• Audit Committee
1.Dependence to Bernard Ebbers, CEO
2.Lack of Internal Control
• External Auditor
1. Reliance on perceived strong internal
control
2. Self- Interest Threat
• External Environment
1.Double Dot Com Bubble
2.Greed at WallStreet
DISCUSSION OF
THE CASE
INTERNAL ENVIRONMENT

1.Lack of strategic planning

- non-existent ‘proper corporate governance
protocols’
- synopsis of their corporation’s financial
plans when the WorldCom will halt the
aggressive acquisition
INTERNAL ENVIRONMENT

2. Lack of ethical conduct and integration of

accounting system
- The consistent pressure from the top
management given to the employees were
boundless
- Code of Ethics was disapproved by
Ebbers and described it as a “colossal
waste of time”.
INTERNAL ENVIRONMENT

3. Lack of outlet for concern

- It was so hard for them to raise their
concern about the policies implemented
and the behavior of the staffs
- upper level employees because they
weren’t able to communicate the problem
when they were asked to participate in
fraud
TOP MANAGEMENT

1. Ebbers’ Individualistic Culture and Greed for

increase in personal worth
- “His plans was the company’s plan”
- he can’t be questioned for the decisions that he
was making for the company
- Ebbers had made several personal purchases
which were quite extravagant
- Board found out about these loans, they failed
to take any action and allowed the loans to
carry on.
AUDITING COMMITTEE
- Lack of independence: unawareness of
duties and responsibilities

INTERNAL AUDIT
- Lack of internal control
External Auditors
- Arthur Andersen was the one responsible for
providing an independent opinion of the
financial situation at WorldCom for investors
and creditors.
- A flaw in Andersen’s approach was that it
limited its testing of account balances, relying
on WorldCom’s perceived strong internal
control environment.
- Andersen failed to bring this problem to the
attention of audit committee.
- Self interest threat
EXTERNAL ENVIRONMENT
- Double Dot com bubble
the technology and Internet sector of
WorldCom, announced that internet traffic was
doubling every 100 days.
people started to invest rapidly into the
volatile stocks of the Internet and
telecommunication companies
the growth is empowered by this guibility
- Greed at Wall Street
the perceived unlimited growth in the
internet and telecommunications companies
bubbles were creating led to a significant flow of
capital to WorldCom and other
telecommunications companies.
WorldCom was deceiving the public through
the misstated financial statements and through
Jack Grubman’s repetitive “buy” ratings of the
stock.
DISCUSSION OF
THE FRAUD
FRAUD COMMITTED:
FRAUD COMMITTED:
• Company capitalizedsome
Company capitalized some revenue
revenue
expenditure
expenditureand showed
and showedit itasascapital
capitalassets
assets
in the Balance
in the BalanceSheet.
Sheet.Violating
Violatingthetheprinciples
of GAAP (Generally
principles of GAAP,Accepted
(GenerallyAccounting
Accepted
Principles) company
Accounting created
Principles) company worthless
created
assets.
worthless assets.
 $0

$ 20060
$ 100
Capitalization of line costs
• When you are a telecommunications company,
a major expense is composed of line costs
• To be able to provide service to the customers
and to generate revenue, but they must have
the infrastructure to do that.
• In WorldCom’s case, they had to pay rent to
other companies to use their cable and towers.
This is an expense in the WorldCom’s part as
payment for the rent.
• However they have been treating these line
costs as an asset.
 Asset VS. Expense
Asset Expenses
1. A resource controlled by 1. An outflow of economic
the entity
benefits
2. A result of past transaction
3. A future economic benefit 2. It will either decrease
is expected to flow to the asset or increase liability
entity 3. Decreases owner’s equity

“An asset is when the economic “the expense is when an economic

benefits will be consumed in the benefits of an asset are actually
future” consumed (used up)”
DECISION
COMPANY

Removal of top management

- Ebbers, the CEO of WorldCom resigned
from his position
- Sullivan, chief financial officer was fired
- Myers , Senior Vice President/ Controller
resigned
Re organization of the Company:
- WorldCom changed of name to its biggest acquisition, MCI
- New President , COO, CFO, general counsel, and director
of internal control recruited . The entire
- Board of Directors was replaced
New External Auditor was hired to re-audit the financial
statement
- Finance and accounting department in Clinton, Mississippi,
where the fraudulent activities occurred, shut down
- More than 400 new finance and accounting personnel were
hired, 17,000 of the existing 85,000 employees were
terminated
- New ethics and training program implemented for
employee.
Top Management was convicted

-CEO Ebbers, 25 year imprisonment

-CFO Sullivan, 5 year imprisonment
-Senior Vice President Myers, Yates 1 year and 1 day imprisonment
-Analyst in Wall Street, Jack Grubman was not criminally convicted,
Grubman paid $15 million in penalties and disgorgemen charged
by SEC and New York Stock Exchange
-Auditors , Kenneth M. Avery and Melvin Dick( Arthur Anderson
LPP) ,revocation of license/ admission to practice profession
Monetary Penalty
Court orders a fine of $1.51 billion, but the SEC would agree to
collect only $500 million as part of WorldCom's bankruptcy
proceedings.
The Court appoint a Corporate Monitor to oversee the proposed re-
organization of WorldCom
CONCLUSION
• WORLDCOM once become the telecom giant
in the U.S. but turns out to be tha greatest
accounting fraud in history. What causes this
company to its tragic downfall? FRAUD
Who to be blame?
• The use of accounting fraud in changing
numbers in financial statements can be perform
by anyone, but at the end of the day fraud is still
fraud. Once it can be uncovered, those persons
who did it might lose everything they have.
• WorldCom, As well as other companies could minimize the
risk of being exposed into fraudulent environment if the
auditor manage to look at the bigger picture of accounting
records, reviewing every details and has no limitations by the
management when it comes to the company’s record, and if
the reliance of trust and honesty from the company’s
management will be avoided. In this practice, the company as
well as auditors would be able to discover the error as early
as it can be and change the way it is conducted before it
becomes illegal
• What happened with WorldCom will always be a redflag
warning for every business industries signifying that fraud can
bring the business on its highest but once it is discovered,
everything you worked hard for might be taken away from
your hands and everything will come into its ending.