accounting fraud at worldcom c9

8/3/2019 Accounting Fraud at WorldCom C9

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Accounting Fraud at WorldComGroup - 9

MACR, Section CChanchal Raj 208

Deepak Prasad 210

Kumari Sonia 214

Mukesh Meena 219

Nishant Negi 222

Preethi R S 228


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WorldCom

Long Distance Discount Services, Inc. (LDDS) began in Hattiesburg, Mississippi

1983

LDDS selected Bernard Ebbers to be its CEO

1985

Merged with Advantage Companies Inc

Became a Public Company

1989

LDDS became the fourth-largest long-distance carrier in USA

1993

Company name was changed to LDDS WorldCom

Became WorldCom in May

1995

Became a full-service telecommunications company

1998


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Top Executives,2002

Bernard Ebbers, CEO

Scott Sullivan, CFO

Ronald Beaumont, COO

David Myers, Controller

Cynthia Cooper, Director Internal Audit

Thomas Bosley, SVP US Operations


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Merger & Acquisitions

Companys growth under WorldCom was fuelled primarily through acquisitionsduring the 1990s

1992-Merged with Advanced Communications Corp

Acquisitions

1993-Metromedia Communication Corp

1993-Reurgens Communications Group

1994-IDB Communications Group, Inc

1995-Williams Technology Group, Inc

1996-MFS Communications Company

Included UUNet Technologies, Inc

1997- MCI Communications

1998-CompuServe

Retained the CompuServe Network Services Division

Sold its online service to America Online

2001-Digex


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Corporate Culture

Acquisition led to a hodgepodge of people and cultures

Headquarters for Network Operations in Texas

Human resources department in Florida

Legal department in Washington,D.C.

No written policies

Each department had its own rules and management style

Encouraged a systematic attitude conveyed from the top down

Compensation to Ebbers and Sullivan beyond the companys approved salary and bonusguidelines

Employees had no platform for expressing concerns about company policies or behavior


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Corporate Culture

Between 1999-2002

50% non-executive

Former owners, officers or directors of companies acquired by WorldCom

Board meeting 6 times a year

Prior April 2002, outside meeting directors never met by themselves

Always got manipulated wrong information from management

Distant and detached from the working of the Company

Board of Directors

Acquisitions through commercial bank loans secured by his personalWorldCom stock

WorldCom did not receive any collateral from Ebbers or his businessinterests to secure these loans

By April 29, 2002 the loans and guarantees to Ebbers exceeded $400 mn

CEO Ebbers had acquired and was managing several

unrelated businesses


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Changing Scenario

1990s-Focused on building revenues and acquiring capacity sufficient to handle expected growth

Revenue growth was a key to increasing the companys market value

Encouraged managers to spend whatever was necessary to bring revenue in the door

Long-term costs of a project outweighed short-term gain

Entered into long-term fixed rate leases for network capacity

2000-Industry conditions began to deteriorate due to

Heightened competition

Overcapacity

Reduced demand at the onset of economic recession and the aftermath of dot-com bubblecollapse

Struggled to maintain Expense-to-Revenue Ratio @42%


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AccountingTactics

Release accruals that were too high relative to future cash payments

Released $3.3 billion worth of accruals

Several business units were left with accruals for future cash payments that were

well below the actual amounts they would have to pay when bills arrived in thenext period

1999-00-Accrual Releases

Stop recognizing expenses for unused network capacity

2001-

Capitalize $771 mn of non-revenue-generating line expenses into an assetaccount

Construction in Progress Account

Reverse $227 mn of the capitalized amount and to make a $227 mn accrualrelease from ocean-cable liability

2002-

Capitalize $818 mn line costs

2001-02-Expense Capitalization


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Effect of CFOs Directions

Directions

Removing Fees paid to lease other companies phone

networks Removing Computer Expenses

This led to huge decrease in operating expenses

Hence huge increase in Net Income

On income Statement

Directions

Added Computer assets and Leasing assets to balance sheeton Asset side

Adding Retained Earnings to liabilities side

On balance sheet


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Accounting and Audit

TO BE FILLED


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Accounting and Audit

WorldCom repeatedly refused to Andersens request to access thecomputerized general ledger

Myers, Stephanie Scott, and Mark Willson instructed WorldCom staff aboutwhat information could and could not be shared with Anderson

Withheld information, altered documents, omitted information from requestedmaterials and transferred millions of dollars in account balances to mislead

Anderson

Still Andersen rated WorldComs compliance with requests for information asfair


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The Endgame

Coopers internal audit team discovered $3bn in questionable expenses

Including $500 mn in undocumented computer expenses

June 20-Met in Washington D.C. with the audit committee and disclosedtheir findings of inappropriate capitalized expenses

Board told Sullivan and Myers to resign immediately Myers resigned

June 25-WorldCom announced that its profit had been inflated by $3.8bnover the previous five quarters

Nasdaq immediately halted trading of WorldComs stock

S&P lowered its long-term corporate credit rating on WorldCom bonds fromB+ to CCC-

June 26-SEC initiated a civil suit of fraud against WorldCom

U.S. Justice Department launched criminal investigations into the actions ofBernie Ebbers, Scott Sullivan, David Myers, Buford Yates, Betty Vinson andTroy Normand

June-2002

July 21, 2002 - WorldCom filed for Chapter 11 bankruptcy


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What is Chapter 11 Bankruptcy?

Reorganization A legal way to salvage a company rather than liquidate it

The company is temporarily protected from its creditors

Creditors are encouraged to negotiate new terms withthe company

Acceptance of a reorganization plan requires approval of: 2/3 of the $ amount and more than 1/2 of the creditors who cast

votes 2/3 of each class of stockholders who cast votes

Confirmation by the court Cram Down-Court also has the authority to force

acceptance of a plan that was voted down As a final alternative, the court can convert a Chapter 11

Bankruptcy to a Chapter 7 Liquidation at any time


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The Endgame

August 28-David Myers pleaded guilty to three felony charges

Securities Fraud

Conspiracy to commit fraud

Making false fillings with the SEC

August-2002

Yates, Vinson and Normand each pleaded guilty to

Securities Fraud

Conspiracy to commit fraud

Making false fillings with the SEC

October 2002

WorldCom was renamed MCI in 2004 when it emerged from bankruptcy

17,000 jobs cut to save $1 billion


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The Endgame

Sullivan pleaded guilty to federal fraud and conspiracy charges

U.S. Justice Department indicted Bernie Ebbers

March 2004

10 former directors agreed to pay $54 million to settle a shareholder class-action lawsuit

January 2005

Ebbers was sentenced to 25 years in prison

March 2005

Betty Vinson was sentenced to 5 months in prison and 5 months of home detention

David Myers and Bufford Yates received jail sentences of a year and a day

August 2005

Bennie Ebbers entered prison

September 2006


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Thank You

References:

http://en.wikipedia.org

Casebook


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accounting fraud at worldcom c9

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