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Ankit Jain Rohan Sharma Tushar Shigwan Sneha Agrawal Sujay Bachewar Abhinandan Nandanikar Abhilash Nair Payal Mody

The document discusses the WorldCom accounting scandal of 2002. It summarizes that: WorldCom falsely reported billions in line costs as capital expenditures to mask declining profits; this was uncovered by internal auditor Cynthia Cooper; WorldCom filed for bankruptcy but later emerged from bankruptcy as MCI. Key executives were convicted for fraud including CEO Bernard Ebbers who was sentenced to 25 years in prison.

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34 views

Ankit Jain Rohan Sharma Tushar Shigwan Sneha Agrawal Sujay Bachewar Abhinandan Nandanikar Abhilash Nair Payal Mody

The document discusses the WorldCom accounting scandal of 2002. It summarizes that: WorldCom falsely reported billions in line costs as capital expenditures to mask declining profits; this was uncovered by internal auditor Cynthia Cooper; WorldCom filed for bankruptcy but later emerged from bankruptcy as MCI. Key executives were convicted for fraud including CEO Bernard Ebbers who was sentenced to 25 years in prison.

Uploaded by

puneethkunder
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Ankit Jain

Rohan Sharma
Tushar Shigwan
Sneha Agrawal
Sujay Bachewar
Abhinandan Nandanikar
Abhilash Nair
Payal Mody
 1985 : Group of motel owners
Location : Jackson , Mississippi
Company : Long Distance Discount Service
 CEO : Bernard Ebbers, Former basketball
Coach
 During 1990s, world’s largest internet
backbone provider and carrier of international
voice traffic
 Dot Com Burst :Telecom Industry slows down

 WorldCom Stock declines

 CEO came under pressure from Banks to cover


margin calls

 Started use of shady accounting methods to mask its


declining financial condition by falsely professing
financial growth & profitability to increase the price
of the stock
 Exaggerated earnings by $ 3 bn in 2001 and reported
lower costs and accomplished it by two ways:-
 The accounting dept. underreported 'line costs’ by
capitalizing these costs on the balance sheet rather
than properly expensing them.
 They inflated revenues with bogus accounting entries
from ‘corporate unallocated revenue accounts’ .
 Stock options as performance incentive made it
extremely lucrative for managers to keep stock prices
high

 The executives especially CEO were responsible for


inflating the internet bubble more than anyone else

 Board approved $10 million for CEO; while laying


off 6000 employees
 On July 21, 2002, WorldCom filed for Chapter 11
bankruptcy protection
 The largest such filing in United States history. The
company emerged from Chapter 11 bankruptcy in
2004 becoming MCI.
 On March 15, 2005 Bernard Ebbers (CEO) was
found guilty of all charges and convicted on fraud,
conspiracy and filing false documents with regulators.
 He was sentenced to 25 years in prison.
Executives and Accounting Staff
6 individuals convicted of fraud / conspiracy / false filings
Ebbers – CEO 25 years in prison
Sullivan – CFO 5 years in prison
Myers – Controller 1 year in prison
Yates – Dir of Acctg 1 year in prison
Vinson – Acctg Dept 5 months in prison
Manager 5 months house arrest
Normand –Acctg Dept 3 years probation
Manager
Above 6 individuals agreed to pay a total of $24-34M to settle
securities class action case
 He was obsessed with the company share price
reaching $100.
 He was one of the biggest borrowers of the Bank of
America.
 During the 1990s, Ebbers total debt exceeded $1
billion for yachts, farms, a marina, ranches and
personal gifts.
 By April 2002 when it became clear that he couldn’t
pay back the debt, the WorldCom board requested his
resignation with a retirement package of $1 million
per annum.
 Ebbers’ most loyal lieutenants

 By age 37, he was named America’s one of the Best


CFO by CFO magazine

 During the crash, he was directed by Ebbers to


capitalize operating expenses

 He even directed the company Comptroller David


Myers to reduce the reported line costs and increase
reported earnings
 Jack Grubman (JG):
• Analyst at Salomon Smith Barney (SSB).
• Considered as the telecommunications industry expert and
the ultimate power broker in the telecom industry
• The close relationship between SSB and WorldCom can be
explained by the $22 billion of WorldCom deals that SSB
underwrote
• He was always ‘buy’ on WorldCom
• His company allegedly gave unsuitable financial advice to
the employees of WorldCom to invest a large portion of
their retirement money in the stocks of the company
 Arthur Andersen was supporting WorldCom’s
management in misleading audits.

 The motivation was substantial consulting work from


WorldCom

 Also in 2001, Arthur Andersen’s entire service fees


from WorldCom were $16.8 million and only 26% of
the fees were related to audit fees
 She was the Vice President, Internal Audit
 She was the first person to sense that something was
“terribly, terribly wrong”
 After the Enron case, where Arthur Andersen was
involved, Cynthia started doubting the credibility of
the external auditors
 They started working till late night, retracing the
footsteps of the external auditors, working behind the
back of management
 By May 2002, Cooper and her team discovered the
company’s public reports had categorized billions of
dollars of operating costs as capital expenditures

 She then brought this enormous fraud to the notice of


the Audit Committee

 After the debacle, Cooper was designated as the


Time’s person of the year.
 WorldCom with $36 billion in debt re-emerged as
MCI
 Under the bankruptcy agreement, the company had to
pay $750 million to the wronged investors.
 In February 2005, Verizon Communications agreed to
acquire MCI for $7.6 billion. MCI was incorporated
as Verizon Business on the 6th of January 2006
 A good way to avoid management oversights is to
subject the control mechanisms themselves to
periodic surprise audits…
The point is to make sure that internal audits and
controls are functioning as planned

It is a case of inspecting the inspectors and taking the


necessary steps to keep the controls working
efficiently
 It is up to Top Management to send a clear &
pragmatic message to all employees that good ethics
is still the foundation of good business
 Be aware of your environment
 No job is worth breaking the law or committing
unethical acts for
 Transparency
 Documentation & Internal controls
 Increased operational effectiveness
 Systematized process for early identification of
business risks/ whistle blowing issues/incident
management

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