Worldcom Paper Accounting

Financial Accounting

Due: April 17, 2008

MON & WED 2:00-3:45

WorldCom Case

WorldCom was an American telecommunication company back in the 1990's that made many successful mergers and then ran into serious problems with the SEC. In 1997 WorldCom merged with MCI communications for 37 billion dollars and became the second largest merger in US history. WorldCom was the second largest long distance phone service provider here in the US and also owned major part of the internet system servers. IN 1999 Sprint Corporation and MCI WorldCom announced a 129 billion dollar merger that would make the company the largest supplier of long distance calls but the department of justice was scared they would become a monopoly.

Former CEO at that time was Bernard Ebbers who was cashing in on his companies profit and he became very rich of WorldCom stocks. Around 1998 the telecommunication industry entered a downturn, and WorldCom without the Sprint merge had suffered a serious blow. At that time the stocks were beginning to drop and business was slow. CEO Ebbers came under a lot of pressure from he banks to cover margin calls and also investor wanted to see the stock prices high. By 2001 Bernard Ebbers had borrowed more than 400 million dollars to try to cover those margin calls. Ebber was able to get the loans because of the companies’ stock performance but as we found out a couple of years later they were using fraudulent account procedures to hide their true performance levels.

Beginning in 1999 and continuing through 2002, the company (under the direction of Scott Sullivan (CFO), David Myers (Controller) and Buford “Buddy” Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining financial condition by painting a false picture of financial growth and profitability to prop up the price of WorldCom’s stock. The fraud was accomplished primarily in two ways: Underreporting вЂ?line costs’ (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them, and also by inflating revenues with bogus accounting entries from вЂ?corporate unallocated revenue accounts’. It is estimated that only 50 individuals of the 5000 employed were in on this and most of them were high paid workers like regional finance majors. I read somewhere that Ebbers would sometimes pay some employees like 10,000 dollars ins tock for them and their wife's to keep their mouths shut.

WorldCom’s internal audit department uncovered approximately $3.8 billion of the fraud in 2002 during a routine examination of capital expenditures and alerted the company’s new auditors, KPMG (who had replaced Arthur Andersen, WorldCom’s external auditors during the fraud). Shortly thereafter, the company’s audit committee and board of directors were notified of the fraud and acted swiftly: Sullivan was fired, Myers resigned, Arthur Andersen withdrew its audit opinion for 2001. The SEC launched an investigation into these matters on June 26, 2002 and by the end of 2003, it was estimated that the company's total assets had been inflated by around $11 billion.

IN 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest filing in United States history. WorldCom changed its name to solely MCI, and moved the corporate headquarters from Clinton, Mississippi to Dulles, Virginia, on April 14, 2003.Under the bankruptcy reorganization agreement, the company paid $750 million to the SEC in cash and stock in the new MCI, which was intended to be paid to wronged investors. WorldCom destroyed the lives of many workers and investors who had all their life3 earnings invested. By the time all this was going on WorldCom stocks fell from 60 dollars to just some cents. Also in 2002, 5100 employees were laid off because the company shutdown. It amazes me why a profitable company that was doing well would decided to alter their records for what to have to pay it all back in court and humiliated themselves.

In 2003 Michael Capellas became the new CEO and Robert Blakely CFO. Both men had a tremendously giant job to clean up MCI and get them out of Bankruptcy. I did some research on Bernard Ebbers and he was a gangster. At one interviewed he even said that he knew nothing about the telecommunication industry and I feel he wasn’t ready for the kind of growth his company experience. Ebbers had managed a hotel once but he never had the experience and brain's to run a corporation. If the CEO of the company does not have integrity then the whole company will fall apart like WorldCom did just like a pyramid scheme.

The 62-year-old Blakely brought badly needed turnaround