Worldcom Case Summary

WorldCom Inc. was US based telecommunication company started as Long Distance Discount Service Inc. It was found in 1983 in Jackson, Mississippi. It became globally famous after “the fraud of the century” has been discovered.

Two basic accounting frauds in WorldCom case took place:

• Inflated revenue

• Misclassification of expenses: large portion off expenses, which were related to building out the telecom system, were treated as capital expenses. Such misclassification allowed to increase significantly the company’s EBITDA.

Ms. Cooper led a team of internal auditors of WorldCom Inc. She was asked to help with a review of books for the new CEO, John Sidgmore. Her job was to go through capital expenditures. Going through the books, she

Gene Morse, an internal auditor, discovered an accounting entry for $ 500 million in computer expenses without any invoices or documentation to back up the entry. He immediately informed his boss, Ms. Cooper. They found that previous CEO, Scott Sullivan, was moving operating costs into the capital expenses. It was the biggest expenses of the company. Instead being expensed, the operating cost were amortized. Such method does not comply with GAAP standards. This practice allowed to boost pretax earnings, covering a massive loss. Mr. Sullivan managed to turn a loss for all of 2001 and the first quarter of 2002 into a profit by using such method of classification. $3.8 billion of expenses were booked improperly and had to be restated. It turned to be the largest restatement in corporate history. Ms. Cooper contacted the head of WorldCom’s auditing committee, Max Bobbitt. The company started an internal investigation in order to find out what happened and who knew about the fraud. A person inside the company, mentioned that Mr. Sullivan never tried to cover his aggressive

Sullivan came to WorldCom Inc. in1992, when his company was acquired by WorldCom. They worked closely together. Mr. Ebbers always relied on Mr. Sullivan’s approval before taking a decision. They accomplished together many successful acquisitions. Overall, they had good relationship based on mutual trust. They were considered one of the best pairings in American business in the late 90s. Later during the investigation process Mr. Sullivan stated that he was significantly pressured by Mr. Ebbers to install suspicious accounting practice. In WorldCom’s fraud case pressure played a crucial role. As a key element of fraud triangle, it basically corrupted the top of management and employees. Mr. Ebbers was using another excuse. He stated that he was not aware what was going on. He emphasized on the lack of business background. In early 2000s Mr. Ebbers could possibly get way. Nowadays, thanks to Sarbanes Oxley Act, management have to review all financial reports. The outcome of this fraud was devastated. 500,000 employees lost their jobs at WorldCom. Shareholders lost a great deal of money, nearly $2 trillion. The investors’ trust was lost. DJIA decreased by 6.7 points. Many companies in the same industry “came under fire” for its accounting. Some people, who were familiar with Mr. Sullivan mentioned, that he firmly believed that he had not done anything