worldcom-grp 2

8/7/2019 worldcom-grp 2

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Ankit JainRohan Sharma

Tushar ShigwanSneha Agrawal

Sujay BachewarAbhinandan Nandanikar

Abhilash NairPayal Mody


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1985 : Group of motel owners

Location : Jackson , Mississippi

Company : Long Distance Discount

Service

CEO : Bernard Ebbers, Former basketball

Coach

During 1990s, worlds largest internetbackbone provider and carrier of

international voice traffic


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Dot Com Burst :Telecom Industry slows down

WorldCom Stock declines

CEO came under pressure from Banks to cover

margin calls

Started use of shady accounting methods to

mask its declining financial condition by falsely

professing financial growth & profitability to

increase the price of the stock


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Exaggerated earnings by $ 3 bn in 2001 and

reported lower costs and accomplished it by

two ways:-

The accounting dept. underreported 'linecosts by capitalizing these costs on the

balance sheet rather than properly expensing

them.

They inflated revenues with bogus accounting

entries from corporate unallocated revenue

accounts .


6/20

Stock options as performance incentive made it

extremely lucrative for managers to keep stock

prices high

The executives especially CEO were

responsible for inflating the internet bubble

more than anyone else

Board approved $10 million for CEO; while

laying off 6000 employees


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On July 21, 2002, WorldCom filed for Chapter

11 bankruptcy protection

The largest such filing in United States history.

The company emerged from Chapter 11bankruptcy in 2004 becoming MCI.

On March 15, 2005 Bernard Ebbers (CEO) was

found guilty of all charges and convicted on

fraud, conspiracy and filing false documents

with regulators.

He was sentenced to 25 years in prison.


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Executives and Accounting Staff

6 individuals convicted of fraud / conspiracy / falsefilings

Ebbers CEO 25

years in prisonSullivan CFO 5 years in prisonMyers Controller 1 year in prisonYates Dir of Acctg 1 year in prisonVinson Acctg Dept 5 months in prison

Manager 5 months house arrestNormand Acctg Dept 3 years probation

ManagerAbove 6 individuals agreed to pay a total of $24-34M to

settle securities class action case


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He was obsessed with the company share price

reaching $100.

He was one of the biggest borrowers of the

Bank of America.During the 1990s, Ebbers total debt exceeded

$1 billion for yachts, farms, a marina, ranches

and personal gifts.

By April 2002 when it became clear that hecouldnt pay back the debt, the WorldCom

board requested his resignation with a

retirement package of $1 million per annum.


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Ebbers most loyal lieutenants

By age 37, he was named Americas one of the

Best CFO by CFO magazine

During the crash, he was directed by Ebbers to

capitalize operating expenses

He even directed the company Comptroller

David Myers to reduce the reported line costs

and increase reported earnings


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Jack Grubman (JG): Analyst at Salomon Smith Barney (SSB).

Considered as the telecommunications industryexpert and the ultimate power broker in the telecomindustry

The close relationship between SSB and WorldComcan be explained by the $22 billion of WorldComdeals that SSB underwrote

He was always buy on WorldCom His company allegedly gave unsuitable financialadvice to the employees of WorldCom to invest alarge portion of their retirement money in the stocksof the company


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Arthur Andersen was supporting WorldComs

management in misleading audits.

The motivation was substantial consulting workfrom WorldCom

Also in 2001, Arthur Andersens entire service

fees from WorldCom were $16.8 million andonly 26% of the fees were related to audit fees


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She was the Vice President, Internal Audit

She was the first person to sense that

something was terribly, terribly wrong

After the Enron case, where Arthur Andersenwas involved, Cynthia started doubting thecredibility of the external auditors

They started working till late night, retracingthe footsteps of the external auditors, workingbehind the back of management


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By May 2002, Cooper and her team discovered

the companys public reports had categorized

billions of dollars of operating costs as capital

expenditures

She then brought this enormous fraud to the

notice of the Audit Committee

After the debacle, Cooper was designated as

the Times person of the year.


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A good way to avoid management oversights isto subject the control mechanisms themselvesto periodic surprise auditsThe point is to make sure that internal audits

and controls are functioning as planned

It is a case of inspecting the inspectors andtaking the necessary steps to keep the

controls working efficiently

It is up to Top Management to send a clear &pragmatic message to all employees that goodethics is still the foundation of good business


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Be aware of your environment

No job is worth breaking the law or committing

unethical acts for

Transparency

Documentation & Internal controls

Increased operational effectiveness

Systematized process for early identification of

business risks/ whistle blowing issues/incident

management


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worldcom-grp 2

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