Accounting Fraud at WorldCom

WorldCom Group, a telecommunication company with more than $30 billion in revenues, $104 billion in assets, and 60,000 employees stunned the world when it filed for bankruptcy protection on July 21, 2002 under chapter 11 of the U.S. Bankruptcy Code. The company has overstated its pre-tax income by at least $7 billion, a deliberate miscalculation which was at that time largest in history. The company wrote down about $82 billion and the company’s stock once valued $180 billion became nearly worthless. About seventeen thousand employees lost their jobs and service to WorldCom’s 20 million retail customers was also jeopardized.

The main player for this whole accounting fraud was the CEO Bernard J. Ebbers. The company accumulated $1.5 million in debt due to its lack of technical experience soon after it started and then Ebbers was given the responsibility to run things. On the hindsight, Ebbers was not the right person as his background didn’t matched with the current job’s role and moreover he lacked technology experience. The three major bad practice which he followed were rapid expansion of the company, financial contrivance and giving a lot of unnecessary incentive to employees. The company was driven by sort term goals and secured deals which was often overpriced and soon tried to be full service Telecommunication Company. The company also struggled to maintain the 42% E/R ratio. Moreover the company also followed so many accounting practiced which were not in accordance with GAAP like release of accruals and capitalization of expenditures. The company totally focused on building revenue and neglecting all the good practices like a healthy corporate culture, written rules of conduct etc. I most cases the employees of financial, accounting and investor relations departments were granted compensation beyond the company’s approved salary and even human resource department never objected to such special awards.

The other major factors were the little importance given to the internal audit and legal department which made the internal audit almost powerless and no transparency was left in the accounting system. The CEO along with many senior executives had personal debts taken on the stocks of the company. Although many people sensed that something is going wrong with the company but most people thought that Sullivan with his “whiz kid” CFO reputation will take care of everything. The failure of the telecommunication industry proved all the strategies wrong. Soon, Cynthia Cooper found out about all the wrong practices, but was stopped by CFO to report any of those. WorldCom did not modify its analytic audit approach and the misconstrued accounting practice continued. Finally on June 20, Cooper and her internal audit team met in Washington D.C. with the audit committee and disclosed their findings of inappropriate capitalized expenses. Soon, Sullivan was fired and Mayers resigned. On June 25, 2002, WorldCom announced that its profit has been inflated by $3.8 billion over previous five quarters. Trading of WorldCom stocks was immediately halted and S&P lowered its long term corporate credit rating.