Accounting Fraud at WorldCom C9
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Transcript of 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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