Worldcom Scandal Overview

Comparison to Enron

• Worldcom less famous than Enron but similar in manipulating stock value.
• Both companies artificially inflated stock to appear more successful than they were.

Company History

• Originally founded as LDDS (Long Distance Discount Services Inc.) in 1983 in Hattiesburg, Mississippi.
• Founded by Bernard Eers and three investors.
• Became MCI Worldcom after a $37 billion merger with MCI Communications in 1997.
• Merged with over 60 telecommunications firms, becoming a major player in the industry.
• Name changed to Worldcom in 2000.

Early Successes and Growth

• Major acquisition in 1992: Advanced Telecommunications Corporation for $720 million.
• Attempted merger with Sprint rejected due to monopoly concerns.

Accounting Irregularities Begin

• Issues started around 1999 with questionable accounting practices.
• December 2000: Financial analyst Kim Amay raised concerns about allocating labor as capital expense.
• Amay laid off in March 2001 after reporting concerns.

Understanding Capital Spending

• Capital Expense (CapEx): Investments in fixed assets (e.g., buildings, equipment).
• Regular Expense: Day-to-day operational costs.
• Misclassification of expenses can mislead investors about company health.

Internal Investigation

• May 2002: Glenn Smith, internal auditor, suggested early audit due to concerns about capital expenditures.
• Cynthia Cooper and team began investigating entries related to "prepaid capacity" which was not recognized as a legitimate term.
• Discrepancies in accounting records led to further scrutiny.

Discovery of Fraud

• Audit team discovered large amounts improperly classified as capital expenditures.
• Entries created to artificially inflate financial statements, leading to reported profits despite real losses.
• By June 10th, audit revealed significant questionable financial practices.

Management and Audit Committee Response

• Internal audit found $3.8 billion in entries from 2001-2002 that were manipulated.
• KPMG, external auditors, began review and confirmed irregularities.
• Management, including COO Scott Sullivan, attempted to justify actions but failed to provide valid explanations.

Restating Earnings and Bankruptcy

• On June 25th, 2002, Worldcom announced they would restate earnings and admitted to inflating financial records.
• Filed for Chapter 11 bankruptcy on July 21, 2002 after revealing a $3.8 billion fraud, with total fraud ultimately estimated at $11 billion.

Legal Consequences

• CEO Bernard Eers convicted of fraud, sentenced to 25 years in prison; released in 2019.
• Other executives faced various prison terms and probation.

Aftermath and Legacy

• Worldcom emerged from bankruptcy in 2004, but with significant debt.
• Acquired by Verizon in 2006, integrating into Verizon Business.
• Lesson: Companies must maintain integrity and transparency to avoid severe legal repercussions.