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The WorldCom Scandal

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by

Wali Mehraban

on 4 June 2013

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Transcript of The WorldCom Scandal

WorldCom Scandal What is WorldCom? By: Keyur and Wali What Happened? In 2002, WorldCom had announced it had overstated its earnings in 2001.
The overstatement was over $3.8 billion.
WorldCom had been charged with massive accounting fraud. WorldCom is a US based telecommunications company.
It was the second largest long distance calling company in the US.
Formerly called LDDS(Long Distance Discount Service)
Bernard Ebbers first sketched out an idea for his idea in 1983, and was later appointed CEO of WorldCom in 1985
The corporation was made public in 1989
WorldCom had a merger with MCI in 1998 for $40 Billion, the largest ever at the time
The peak for WorldCom's stocks was in June 1999 at $64.51 per share
WorldCom is now known as MCI
Filed for bankruptcy protection in 2002 Auditing WorldCom's external auditor was Arthur Andersen LLP. since 1989
It was one of the top 5 accounting firms at the time
Andersen denied any involvment to the scandal
AA had many opportunities to disclose the fraud
Andersen was blamed for a major part of the downfall of WorldCom
Andersen has had a series of auditing failures, including WorldCom and Enron(Energy & Utilities company)
On June 14, 2002: Internal auditor, Cindy Cooper, asked for documents supporting numerous capital documents supporting numerous capital expenditures. No supporting documents were found.
After SEC(Securities & Exchange Committee) and an internal auditor investigated and uncovered the fraud, KPMG was appointed as the new external auditors for WorldCom -They had classified the money as capital instead of current expenses.
-This caused an increase in net income and assets.
-Before June 25, the SEC, Security and Exchange Commission, were questioning WorldCom's finacial report due to some abnormalities.
-Also, on June 1 WorldCom had stated they were looking into some other abnormalities. Without the transfer, WorldCom would have had to report a net loss instead of a $1.4 billion profit
The EBITDA in 2001 would have drop to $6.3 billion and in 2002, the first quarter would have been reported as $1.4 billion.
Creating a net loss instead of a net income. How Others were Affected Consumers
20 million customers were to be notified 30 days prior to cutting any services
WorldCom was able to provide services while reorganizing/dealing with the scandal
Corporate Clients
Some of WorldCom's clients include many Wall Street powerhouses, manufacturers, and government agencies
These clients, with complex data networks, may take months to adjust/switch to a different service
Most clients must choose between paying a high price to break contract with WorldCom, or letting their systems decrease in service
Only about 20% of large corporate clients had an escape clause in their contract
Stockholders
Stockholders had little to no chance of recovering their investments
Although stockholders are legally entitled to some money, they are at the bottom of the list Reasons for the Scandal -Offices locations were all over the place
-Employees became yes-men in fear
-rescission greatly reduced stocks
-Bernard Ebbers, leader, took loans which was approximately $400million
-Ebbers was unqualified
-The company borrowed large amounts.
-They had become too focused on profit and did little to create long-term relationships
-E/R ratio was showing negative results, making them unable to reach targeted goal. Bernard Ebbers - Was WorldCom's CEO.
- He was sentenced 25 years at the age of 65
- was charged for fraud and conspiracy
- Was unfit to be CEO
- Basketball coach
-used money to pay for his own debt Scott Sullivan CFO, Treasurer, and secretary
He push staff to make false entries
false public statements
gained approximately $45 million from stocks
sentenced 5 years After -30000 employees lost their jobs
-Investors of WorldCom lost $180 Billion
-Making investors penniless
-WorldCom was $5.75 billion in debt
- credit agreements for 2.65 billion with 26 banks
- banks sue WorldCom for loan defulting
- Shareholders sue investment banks
- filed chapter 11 bankruptcy
-$11 billion of accounting fraud -David Myers, Buford Yates, BettyVinson and Troy Normand all found guilty as well
-many changes have happened to the company and its board of directors
-employees sign pledge of ethics
- now known as "3 Small Business Ethical Dilemmas and What to Do About Them | WePay." The WePay Blog. N.p., n.d. Web. 3 June 2013. <http://blog.wepay.com/2013/03/21/3-small-business-ethical-dilemmas-and-what-to-do-about-them/>.
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"CRS Report for Congress." WorldCom: The Accounting Scandal. N.p., n.d. Web. 3 June 2013. <www.law.umaryland.edu/marshall/crsreports/crsdocuments/RS21253_08292002.pdf>.
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"IGE Business Dilemmas." Institute for Global Ethics: Promoting Ethical Action in a Global Context. N.p., n.d. Web. 3 June 2013. <http://www.globalethics.org/business-dilemmas.php>.
Media, Demand. "Examples of Ethical Issues in Business | Chron.com." Small Business - Chron.com. N.p., n.d. Web. 3 June 2013. <http://smallbusiness.chron.com/examples-ethical-issues-business-24464.html>.
ROMERO, SIMON, and RIVA D. ATLAS. "WORLDCOM'S COLLAPSE: THE OVERVIEW; WORLDCOM FILES FOR BANKRUPTCY; LARGEST U.S. CASE - New York Times." The New York Times - Breaking News, World News & Multimedia. N.p., n.d. Web. 3 June 2013. <http://www.nytimes.com/2002/07/22/us/worldcom-s-collapse-the-overview-worldcom-files-for-bankruptcy-largest-us-case.html>.
"Yahoo voices." WorldCom Scandal: A Look Back at One of the Biggest Corporate Scandals in U.S. History. N.p., n.d. Web. 6 Mar. 2013. <http://voices.yahoo.com/worldcom-scandal-look-back-one-biggest-225686.html?cat=3>.
high, mid-1999 WorldCom shares reached an all-time, and Mr Ebbers became the darling of Wall Street.. "BBC NEWS | Business | Worldcom's ex-boss gets 25 years." BBC News - Home. N.p., n.d. Web. 3 June 2013. <http://news.bbc.co.uk/2/hi/business/4680221.stm>.

" WorldCom accounting scandal | Business | guardian.co.uk ." Latest US news, world news, sport and comment from the Guardian | guardiannews.com | The Guardian . N.p., n.d. Web. 3 June 2013. <http://www.guardian.co.uk/business/2002/aug/09/corporatefraud.worldcom2>.
"Andersen Embroiled in $4 Billion WorldCom Accounting Fraud | AccountingWEB." AccountingWEB. N.p., n.d. Web. 3 June 2013. <http://www.accountingweb.com/topic/firm-news/andersen-embroiled-4-billion-worldcom-accounting-fraud>.
"WorldCom Definition | Investopedia." Investopedia - Educating the world about finance. N.p., n.d. Web. 3 June 2013. <http://www.investopedia.com/terms/w/worldcom.asp>.
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"WorldComNews.com." WorldCom News. N.p., n.d. Web. 3 June 2013. <http://www.worldcomnews.com/worldcomhistory.html>.
Type. "Worldcom Scandal." Scribd. N.p., n.d. Web. 4 June 2013. <http://www.scribd.com/doc/36841791/Worldcom-Scandal>.
Type. "worldcom company." Scribd. N.p., n.d. Web. 4 June 2013. <http://www.scribd.com/doc/9297165/worldcom-company>.
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