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Financial Accounting
Due: April 17, 2008
MON & WED 2:00-3:45
WorldCom Case
WorldCom was an American telecommunication company back in the 1990s 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 stock. The fraud was accomplished primarily in two ways:
Underreporting *ƒ²*ƒ"€š?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 *ƒ²*ƒ"€š?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 wifes to keep their mouths shut.
WorldCom internal audit department uncovered approximately $3.8 billion of the fraud in
