THE RISE AND FALL OF WORLDCOM

This event has been one of the largest accounting scandals in the history of united
states. Thus, how did this massive disaster in the field of accounting begun?

Back in 1983, the AT&T or American Telephone and Telegraph company broken up.
This company practically controls the entire industry going back to invention of
telephone and long-distance network, and now that they are being dissembled, it
allowed new competition in the market, one of these new competitors was called
Long-Distance Discount Services and later rebranded as WorldCom in 1995.

SUMMARY (how it rise and how it fell?)

In 1982, Murray Waldron and William Rector figured and found no long- distance
competitors to AT&T in their local community, then the creation of Long Distance
Discount Services (LDDS), the former name of WorldCom happened. To fund their new
venture, Waldron and Rector found Bernie Ebbers. A successful local businessman that
invests in companies, who also assumed control of the cost management of the
company as it was managed poorly and incurred losses by cutting costs and ensuring
the money was used with utmost efficiency, by then the company was turned around
and is generating profits.

WorldCom then focused in a strategy of growing the company through acquisition and
merging with other big companies, which have resulted significant influence to a lot of
consumers and the greatest grow rate of revenues:

In 1986 REVENUE: $8.6 Million

In 1993 REVENUE: $1.3 Billion

By that, they become the fourth largest long-distance provider in the U.S. But that
success didn’t stop them to expand even more. Merging and acquiring of different
companies are always difficult and risky, however the company managed to do so and
along with its change of identity from Long Distance Discount Services to WorldCom.

From 1994-2001 they had completed over 70 acquisitions, including, the merged with
MCI Communications and they’ve acquired them for $40 Billion dollars, this is a
remarkable acquisition, since MCI is a significantly much larger company.
Then another significant deal announced in 1999, WORLDCOM planned to merge with
Sprint $115 billion deal, however, this deal was blocked by the department of Justice
which feared the combined company would become too large and powerful and control
the market. This deal was needed by WorldCom to contribute to its appearance of rapid
growth to attract more investors, but since it has been blocked, investors started to
question how much longer WorldCom could sustain such growth, and it appeared that
their expansion was indeed slowing down. Faced with these challenges, WorldCom had
to find alternative ways to deliver value to their shareholders.

All of WorldCom’s accounting practices before 1999 were legitimate. Their fraudulent
activities begun around that time driven by the desire to manipulate their earnings and
expenses reports. Which is the prime factor that lead the great company to an even
bigger downfall, to the extent that it dug a grave by the crimes that were imposed my
multiple people desperate to save the company and themselves.

Along with other major factors, Bernie Ebbers, the CEO during this period is widely
considered to be the person who is most responsible for the fraud. Bernie had a string
personal motivation to keep the stock price high because he owned a substantial
amount of WorldCom stock of which was purchased on margin. The stock price fell
which further entangled his personal financial interest with the company’s actual
performance. This situation involved multiple layers of fraud, but for these reasons,
Bernie Ebbers along with CFO Scott Suvan directed the accounting team to make these
illegal adjustments. These Inflated earnings misled investors who relied on them as a
key factor in deciding to buy WorldCom stock.

Though all the of these, they manipulated their Revenues, they also manipulated their
expenses which artificially boosted its earnings. These deceptive tactics was by far the
largest scheme the used in 2003. The SEC compiled a report detailing the extent of
WorldCom’s fraud which revealed that the little more than 3 years, the company
reported more than $9 Billion in fraudulent earnings. A figured later then revised to $11
Billion dollars.

WorldCom’s fraud and overly ambitious growth expectations for internet growth caused
the entire telecom industry to expand far beyond the demand, resulting in an eventual
collapse. In the telecom industry, 500,000 employees lost their jobs. Investors basically
lost their invested money as the market value of the shares crashed down to almost
zero.

Persons involved in the Rise and Fall of the WorldCom

● Alexander Graham Bell- person who invented the telephone and the company
Bell Telephone Company.
 ● Murray Waldron and William Rector- two persons who founded the Long
Distance Discount Service (LDDS), which was a long-distance competitor of
AT&T.
● Bernard “Bernie” J. Ebbers- successful local businessman that funded and
assumed management control of LDDS in terms of cost management.
● Tom Stluka- a WorldCom capacity planner that developed an Excel spreadsheet.
● Kim Emigh- WorldCom Financial Analyst, a person who uncovered the fraudulent
acts.
● Mark Abide- WorldCom Director of Property Accounting, a person who
uncovered the fraudulent acts.
● Glyn Smith- WorldCom Director of Internal Audit, a person who uncovered the
fraudulent acts.
● Cynthia Cooper- WorldCom Vice President of Internal Audit, a person who
uncovered the fraudulent acts

3 Principles

Principle 5: The curse of competitive markets

If an industry is generating large profits, new entrants are usually attracted. The
additional competition and added capacity can result in profits being driven down to the
required rate of return.
In 1986, WORLDCOM reported a revenue of $8.6M, only a few months after Bernie
Ebbers took charge. With a tough and competitive market, they were able to sustain
and rise by acquiring and merging with other companies which made their stocks
skyrocketed with the highest reportedly $60 per share. This new strategy later helped
them buy over 30 different companies. So how does this principle lead to affect or result
in the Fall of Worldcom? After WORLDCOM reached its peak, nearly completing a
$115B deal merge with Sprint Corporation, supposedly having the biggest merger at
that time, an issue arose and the deal was blocked due to “antitrust objections”. And
here we can apply the principle, the company forgot that curse of competitive markets.
Due to the unsuccessful merging with the Sprint Corporation, the company’s
aggressive acquisition strategy has come to a halt and because an intense competition
was happening at the same time, resulting in a huge decrease with their stocks, from
$60 to only $18 per share, the Senior Executives and the CEO headed to unethical and
unlawful solutions. Instead of planning ahead of time and taking more effective and
ethical measures they went to orchestrating a scheme to inflate earnings. The Fall of
Worldcom could've been prevented if they'd identified their competitive advantage and
focused on developing new features to their service. That despite losing their old
aggressive tactics, investors would still want to invest and thus the business will thrive.
Principle #6 Efficient Capital Markets

WorldCom engaged in accounting fraud—they inflated its net income and cash flow by
recording expenses as investments. As a result, they did not apply the Efficient Capital
upMarkets principle as they failed to accurately price the company's stock based on true
information, leading to inflated stock prices, and eventually the company collapsed
when the fraud was exposed by Cynthia Cooper, who was vice president of WorldCom's
internal audit department, and Gene Morse, another auditor.

Principle 10: Ethical Behavior Is Doing the Right Thing, and Ethical Dilemmas Are
Everywhere in Finance

This principle is one of the principle that World Com forget to performance, because
worldcom did a huge accounting fraud, that involved manipulating financial accounts to
conceal losses and earnings, that it caused the WorldCom to collapse. This resulted in
the biggest bankruptcy in American history and cause changes to regulations.

Financial statements should accurately reflect the company's financial condition.

WorldCom manipulated earnings and misclassified expenses to present a healthier
financial situation than was true. Financial reporting should be honest and ethical.
WorldCom's executives engaged in fraudulent activities, including inflating revenues
and deferring expenses.

The World Com Financial reporting should be honest and ethical, Because their
executives engaged in fraud activities, including inflating revenues and expenses. And
their Financial statements should also accurately reflect the company's financial
condition, and their Financial management decisions should also be guided by ethical
considerations. Because The company’s leadership made unethical decisions that led
to financial misreporting that course them in their downfall. So this principle is really
must performance in every company, Ethical Behavior Is Doing the Right Thing that it
can lessen the possibility of the companies downfall.