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WorldCom

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by

Peh Aloysius

on 13 February 2014

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Transcript of WorldCom

WorldCom
Discovery of Fraud
WorldCom was generating profits during eeconomic downturn in the telecommunicaation industry
World com - collasped in 2002, $41 billion indebted.

Ebbers - jailed for 25 years, pay $5.5mil, mansion and other assets worth $40mil to sharholders of worldcom.

Sullivan - jailed for 5 years, pay $10mil worth of mansion and surrender $200,000 in his 401(k) account.

Employees - 17,000 lost their jobs.

Shareholders - lost billions of dollars.

Suppliers - not getting paid.
Where is WorldCom now?
What
Principle of Professional Competence and Due Care - WorldCom
Principle of Professional Competence and Due Care - Arthur Andersen
Arthur Andersen also failed to detect the ongoing fraud

Arthur Andersen was charged guilty for being apart of the Enron Corporation fraud, where they destroyed relevant documents that were evidence of the case. Their integrity was already questionable.
Principle of Professional Behaviour
By being incompetence and involved with accounting scandals that questioned their integrity, both WorldCom’s accountants, internal audtiors and external auditors, Arthur Andersen has discredit the profession
What Did WorldCom Do?
Principal of Integrity
WorldCom capitalized $3.8 billion of its line costs as capital expenditure instead of current expenses.

Both the net income and assets were inflated

The financial statement that WorldCom reported were hence false and it misled investors and shareholders into believing that WorldCom was making promising profits instead of losts.
Codes Of Professional Conduct and Ethics Violated


WorldCom’s internal auditor failed to detect the ongoing fraud of $3.8 billion

Could not produce documents and records to support the transaction.
Did
WorldCom
Do?
Bernard Ebbers
Scott D Sullivan
.1981 LDDS
.Murray Waldron & William Rector
.1983 Bernard Ebbers as CEO
.1995 WorldCom
.Merge with MCI & other telecommunication
companies
.2000 failed merge with Sprint Corp.
.WorldCom's Standstill
.Fail merge with
Sprints Corp.
.$400 mil for
personal use
.Oversight of External
Auditor
.Ineffective system
.Push the blame
.Approached
by Ebbers
.Reject Ebbers
originally
.Ordered the
adjusting of
the accounts
Introduction
Parities involved
How did WorldCom got found out?
Consequences

Principle of Objectivity
Sullivan allowed his emotions and interest to cloud his judgement.

He also persuaded his subordinate, Buford Yates and David Myers to help him in accomplishing the fraud

Buford Yates and David Myers allowed undue influences of Bernard Ebbers to affect their professionalism and also their business judgments.
Consequences
Worldcom is now doing business under the MCI brand name and is the nation's second largest long distance company with more than 20 million customers.
Financial Gimmickery was used
in order to meet wall street analysts
and investors expectations.

This resulted in a rise in expenses as a percentage of its total revenue.
In 1999, WorldCom's revenue growth and stock priced declined
WorldCom decreased the amount of money held in its reserve by $2.8 billion and moved it to the revenue part of its financial statements to cover liabilities that the WorldCom has acquired.
Scott Sullivan mislead investors in thinking that WorldCom is actually making a profit
What did WorldCom do?
In 2000, there was an economic downturn in the telecommunication industry
Classified operating expenses as a long-term investment
$3.85 billion
Journal entry of $500 million of computer expenses with no supporting evidence
In 2002, this raised supiscion among The US Securities and Exchange
Competitior of WorldCom, AT&T Corp were making losses
The internal audit team of WorldCom recieved tips that there were accounting irregularities
Cynthia Cooper, WorldCom's internal auditer, discovered classification of operating expenses as capital expenditure
She confronted Scott Sullivan and then reported the frauds to the head of committee of WorldCom’s board of directors, Max Bobbit
On June 25 2002, WorldCom made its public announcement about the frauds and accounting irregularities in the company
Full transcript