How Unethical Practices Almost Destroyed Worldcom

How Unethical Practices Almost Destroyed WorldComPresented by:

Founded in 1983 by Bernard Ebbers, David Singleton & Murray Waldren

It was initially Called as LDDS- Long Distance Discount Service

On 25th may 1995, the company officially changed its name to WorldCom

Company BackgroundSeries of more than 60 merger and acquisition

In 1998, the company made its biggest Acquisition paying a price of approximately $40 billion for the well-known long distance provider MCI

One of the largest telecom player in the world

Stock Price was Climbed to $64.51 in 1999

Company BackgroundHow the Fraud took placeFrom 1998-2000, WorldCom reduced reserve accounts held to cover liabilities of acquired companiesWorldCom added $2.8 billion to the revenue line from these reserves

Reserves didnt cut it; An e-mail was sent in December 2000 to a division in Texas directing misclassification of expenses.

CFO told key staff members to mark operating costs as long-term investments.To the tune of $3.85 billion. $11 Billion Accounting Fraud over 3 year period (1999 - 2002)Accounting Fraud occurred in two main forms:Understatement of operating expenses of $7B through improper releaseof accruals and through improper capitalization of operating expensesOverstatement of revenues of $1B.

sagar4ContdSummary of Improper Income statement amounts ($ in millions)1999200020012002TotalRevenues $ 205 $ 328 $ 358 $ 67 $ 958 Line Costs $ 598 $ 2,870 $ 3,063 $ 798 $ 7,329 Other Expenses $ 135 $ 676 $ 177 $ (25) $ 428 Total $ 938 $ 3,874 $ 3,598 $ 840 $ 9,250How the Fraud was discoveredJune 14, 2002 - The Internal audit team contacted WorldComs audit committee

Internal auditor, Cindy Cooper, asked for documents supporting numerous capital expenditures.No supporting documents were found

The controller admits to internal auditors that the accounting treatment is wrongStates no accounting standards support this accounting

6 How the Fraud was discoveredJune 20, 2002 - Internal audit explains irregularities to the Audit committee.

June 25, 2002 - WorldCom announces it inflated profits by $3.8 billion over the previous five quarters

June 26, 2002 - civil suit filed, stock trading haltedUltimately, stock was delisted by Nasdaq

July 21, 2002 - WorldCom filed for bankruptcy7sagarReasons behind itCorporate cultureInorganic growthFailing leadershipRecession in the economyVast oversupply of capacityAn unconcerned and malfunctioning Board of Directorsbhagya8

Impact of the FraudShareholders$180B of shareholder value lost (based on peak stock price)

Debt & Preferred Stock holders$37.5B of debt and preferred stock holder value lost

Company$750M settlement paid to SEC

Employees57,000 employees lost jobsAll current and former employees lost most of their retirement savings (invested in WorldCom stock)

Impact of the FraudBoard of Directors12 Directors agreed to pay (out of pocket) a total of $25M to settle securities class action case

Investment BankersSettlement of securities class action case with banks:Citi Group $2.6BJP Morgan $2.0BOther $0.9B

SEC Action:Grubman an Soloman Brothers Securities Analyst fined $15M and banned for life from practice.Impact of the FraudExecutives and Accounting Staff: 6 individuals convicted of fraud / conspiracy / false filings

Ebbers CEO 25 years in prisonSullivan CFO 5 years in prisonMyers Controller 1 year in prisonYates Dir of Acctg 1 year in prison Vinson Acctg Dept 5 months in prison Manager 5 months house arrestNormand Acctg Dept 3 years probation Manager

Above 6 individuals agreed to pay a total of $24-34M to settle securities class action case

Impact of the FraudIndependent AuditorArthur Andersen agreed to pay $65M to settle securities class action case

Insurance CompaniesAgreed to pay $36M to settle claims against WorldCom directors and officers

Post-Fraud Happenings17,000 jobs cut to save $1 billion. WorldCom may write off $50.6 billion in intangible assets.Added additional board members to serve on a special investigative panel to review accounting practices:Former US Attorney General Nicholas KatzenbachDennis Beresford, Former Chairman of the FASBWorldCom is trying to secure loansWorldCom was renamed MCI in 2004 when it emerged from bankruptcyPossible court-approved debt reductionsCompany could spin off several business units

13pimpleSteps to prevent the spectacular downfall of WorldCom

As WorldCom acquired new companies, its accounting procedures, computer systems, and customer service issues became increasingly more complex, and industry experts note that WorldCom struggled to keep up with the growth.

Company employees who tried to bring initial problems to Ebberss attention were discouraged, and Ebbers made it clear he only wanted to hear good news.

This avoidance of problems created a company culture that demanded success at all costs. That ultimately included falsifying financial reports.

Increase customer base

Increase tariff charges to increase revenue

Decrease the cost14Unethical things happening in WorldCom were :-

Wrong accounting Procedure

Auditors did not point out accounting lapses

Co. executive were asked to look after properties of acquired co.s rather than integrating

Losses were shown as capital Expenditure

They were running two billing programmes simultaneously because of this their receivables increased

Their focus was more on Acquisition then integration

If they had adopted Clear business strategy they might have not faced this situation of winding up co. instead they might have been leading market co. in telecom industry .Conclusion