worldcom fraud

BY TEAM

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- WorldCom:Corporate Fraud

MCCP PRESENTATIO

N ON- _

SAYUZ

Largest Bankruptcy Filings

Company Assets (Billions)

When Filed

1. WorldCom $103.9 July. 2002

2. Enron $63.4 Dec. 2001

3. Conseco $61.4 Dec. 2002

4. Texaco $35.9 April 1987

5. Financial Corp of America

$33.9 Sept. 1988

6. Global Crossing $30.2 Jan. 2002

7. PG&E $29.8 April 2001

8. UAL $25.2 Dec. 2002

9. Adelphia $21.5 June 2002

10. MCorp $20.2 March 1989

THE BIGGEST FRAUD EVER

$3.9 Billion Fraud

WorldCom Background

In 1983 Murray Waldron and William Rector got started communication business named LDDS.

Huge telecommunication companyLargest in the U.S.Held responsible for waking up it’s

somewhat sluggish industry in the early 90’s

Changed its name to WorldCom in 1995.Company’s worth $180 billion at peak.

Mission Statement

MISSION:Our objective is to be the most profitable, single service provider of communication services around the world.

Acquisitions by Worldcom

Williams Telecom$2.5 billion MFS Communications TCL Telecom $12.4 billion BLT Technologies Brooks Fiber Properties $2 billion CompuServe merger MCI $40 billion ActiveNet CAI Wireless Systems SkyTel Intermedia Communications $6 billion• Not allowed to purchase Sprint in 2000 because of

antitrust regulation.

BERNARD EBBERS (CEO)

• In 1985 Bernard Ebbers assigned as a CEO.

•He was an aggressive businessman, who seemed to be the fire for WorldCom's success.

• Goal:- “Not to capture market share or be global. Goal is to be no. 1 stock in wall street.”

Cont…

He was known as risk seeking, free spending, over –zealous deal maker for others.

He was responsible for more than 75 mergers by the company.

HIGH GROWTH

$63.5

SHARE PRICE FROM 1985 TO 1999

• Ebbers got loans from banks by securing Worldcom stocks to fund personal investments including $100 million Canada ranch, $658 million in Mississippi timberlands and a $14 million Georgia shipyard and other businesses like rice farm, yatch building company, lumber mill, trucking company, hocky club.

Problems Raised After…

SCOTT SULLIVAN, CFO

• Served as CFO.• Directed staff to make false accounting

entries • Personally made false and misleading

public statements regarding finances.

CYNTHIA COOPER, Internal Auditor

Sullivan instructed Myers (controller of accounting ) to restrict the scope of Cooper’s inquiry.

She dared to ask explanations for capital expenditures which was denied.

Sullivan became furious and asked her to keep away from this inquiry.

On ethical grounds Cooper decided to go ahead.

TIME magazine chose her as “Person of the year – 2002” for her ethical

work behavior.

FRAUD

• WorldCom marketed itself as a high-growth company.

• Market conditions throughout the telecommunications industry deteriorated in 2000 and 2001.

• WorldCom continued to post impressive revenue growth numbers.

• Promises of double-digit growth translated into pressure within WorldCom to achieve those results.

• WorldCom reduced reserve accounts held to cover liabilities of acquired companies

- WorldCom added $2.8 billion to the revenue line from these reserves.

How WorldCom might have mishandled expenses: WorldCom says it improperly handled $3.9 billion in expenses. It improperly “capitalized” costs, meaning it attempted to spread them over many years rather than taking the hit at one time.

Step 1: Company pays costs, which is line cost paid to other companies for maintenance on telecom systems.

Step 2: Those costs aren’t put on the income statement as required. Leaving them out makes WorldCom’s net income higher.

Income

Costs

Balance sheet

Income statement

Step 3: The costs were instead put on the balance sheet as an asset. Companies are only supposed to do this when they buy equipment that will be used over a long period.

Step 4: Then “depreciates” costs, it meaning they are subtracted from net income over years. On the income statement, only a small portion of the costs are included, so cash flow, profit margins and net income are artificially inflated. These are the key measures used to value a company’s stock.

(Costs become assets)

Depreciated costs

Fall In Stock Price…

($63.5 to $2.65 to $0.09)

How the Fraud was discovered

On March 12, 2002, SEC launched an enquiry into the WorldCom Inc.’s accounting practices.

The controller admitted to internal auditors that the accounting treatment was wrong. He stated no accounting standards supported the accounting of the company.

Cont…Three weeks later, the company planned

to layoff 7500 employees. At the end of April, WorldCom reduced

at least $1 billion for its 2002 revenue projections and on April 30, 2002, Bernard Ebbers resigned.

John Sidgmore, the CEO replacing Ebbers, stated he wants to move forward.

July 21, 2002 - WorldCom filed for bankruptcy.

In August 2002, Scott Sullivan, CFO, was indicted by a grand jury on one count of fraud and six counts of securities fraud and false filings involving almost $8 billion.

On September 22, 2005, Bernard Ebber, CEO was sent to prison for 25 years.

Actions…

WorldCom was renamed MCI in 2004 when it emerged from bankruptcy.

Solutions according to us…

In addition to this, some internal changes also needed to be made like terminating all the employees who were involved in fraud.

Organization culture should be changed, dealings should be made more transparent.

Corporate governance should be strictly followed, the principle of interaction, board responsibility, meetings and information, disclosure.

Lessons an average manager can learn…

It can be noticed that Ebbers was a autocratic leader and he had coercive power, the organization was mechanistic and centralized as most of the decisions were taken by the top management.

Ebbers had created an informal structure within the organization as he used to reward heavily those employees who were loyal to him.

Culture adopted by Ebbers was goal oriented and risk taking.

Cont...There was strong co-ordination and

understanding between all the employees of the organization, otherwise such a large fraud could not take place for 1 ½ years.

The main strategy adopted was that of growth through mergers and acquisitions. Ebbers also adopted a strategy of division of work. Here, in this strategy he divided the work among employees such that they could not link it with the fraud. Ex. Accounts department.

Cont...The main principles of corporate governance

were violated.Ebbers used bank loans to pay his personal

liabilities, most of which were secured by stocks of the company hence there was employee theft.

Ebbers was acting unethically whereas Cooper was most ethical person in the company. She also received the award for it, due to her ethical behavior the whole scandal was discovered.