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Manahil Ibrahim

on 4 April 2015

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Transcript of WORLDCOM (MCI, Inc.)

Accounting Scandal
Background Information
Largest merger in history at the time happened- Worldcom merged with MCI Communications Corp. for $40 billion and became MCI Worldcom
A $129 billion merger was announced between Sprint Corporation and MCI Worldcom.
It would have been the largest corporate merger in history and it would have passed AT&T to become the largest communications company US, but the U.S. Department of Justice and the European Union opposed since it could create a monopoly.
The merger was canceled and MCI WorldCom was renamed WorldCom

Monday, November 2, 2014
Vol XCIII, No. 311
Background of Company
Fallout & Aftermath
A month after the internal audit, WorldCom filed for bankruptcy- they had many debts, and their revenues were not as high as they made it seem
Made it the biggest scandal and biggest file for bankruptcy of the time
Emerged from bankruptcy in 2004 and were renamed MCI
Ebbers was sentenced to 25 years in prison & Myers (the controller) was charged
CFO Scott Sullivan received a five-year jail sentence and was charged, which was negotiated because he pleaded guilty
Sullivan served his sentence and was released in 2009
The company paid $750 million to the Securities & Exchange Commission (SEC)
The company still operates (in 2005, Microsoft corporation announced that MCI will join it by providing Windows Live Messenger customers service to make telephone calls)
It was MCI's last new product, called "MCI Web Calling"
After Verizon Communications merged with MCI, this product was renamed "Verizon Web Calling"

Worldcom is a US telecommunications company (now known as MCI) that was very popular during the late 1990s and had a major scandal in the early 2000s
The company began as "Long Distance Discount Services, Inc." (LDDS) in 1983 in Mississippi and in 1985, Bernard Ebbers became CEO
Merged with Advantage Companies Inc. causing the company to be traded publicly as a corporation
LDDS merged with many other communications companies
Became 4th largest long-distance network in the US
Changed its name to WorldCom Inc.

What Happened?
In 2000, the telecommunications industry was in decline and WorldCom’s stock price was decreasing
2001- Banks were demanding Ebbers to cover margin calls on his WorldCom stock so he took loans of $400 million from the company
The board thought that the loans would stop Ebbers from selling amounts of his stocks
1999 to 2002- to maintain the price of the stocks, the company used fraudulent accounting methods to hide their decreasing earnings which was done by Ebbers with the help of Scott Sullivan, the CFO

1. recorded their expenses as long-term capital investments
2. Inflated their revenue accounts
This failed so Ebbers resigned as CEO
The US Securities and Exchange Commission (SEC) was suspicious
2002- the SEC wanted an internal audit to be done, and the team of internal auditors found $3.8 billion worth of fraud
The controller admitted that standards were not followed
A month after the internal audit began, Worldcom filed for bankruptcy
It was revealed that the company's total assets were inflated by $11 billion
Bernard Ebbers (CEO): primary stakeholder
Scott Sullivan (CFO): primary and secondary stakeholder
Board of directors/Company: primary and secondary
Primary stakeholders are the ones who are affected by a particular decision
Secondary stakeholders are the ones who make decisions and are not particularly affected by it
Ebbers decision to use false accounting methods caused himself to be affected as the fraud was caught and he was jailed
The CFO, Scott Sullivan and controller, Myers' decision to also do the same caused them to be jailed/charged
The company went bankrupt, also having to pay $750 million to SEC
Shareholders- when the shares dropped in price, many people lost money
Employees and Investors were also affected
Full transcript