Established in 1988, WorldCom was formed so that the strongest, most capable public relations firms could serve national and international clients, while retaining flexibility and client- service focus inherent in independent agencies. Through WorldCom, clients have on demand access to in-depth communication expertise from professionals who understand the language, culture and customs in the geographic areas of operation. WorldCom has 105 offices in 90 cities and 40 countries on five continents, more than 2000 employees and recorded revenue of US $ 243.5 million in 2008.
In the 90's WorldCom was involved in acquisitions and purchased over 60 firms. The complete financial integration of the acquired company must be accomplished, including an accounting of assets, debts, and a host of other financially important factors. WorldCom moved into Internet Traffic, controlling 50% of US Internet Traffic and 50% of the e-mails worldwide. It purchased MCI in 1997 for US $37 billion. During 1998-2002, WorldCom became the largest long distance operator in the US and by 2002 it had over 20 million customers.
THE TRANSGRESSION- HOW IT ALL HAPPENED
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Bernie Ebbers, Chief Executive Officer (CEO), borrowed $ 366 million to cover losses on stock which was not repaid. He had secured loans from WorldCom to fund personal investments which included a $100 million ranch in Canada, $658 million in Mississippi Timberlands, and a $14 million Georgia Shipyard. Bernie Ebbers netted around $140 million from stock sales. Scott Sullivan served as the Chief Finance Officer (CFO) and had directed the staff to make false entries. Personally he had made misleading public statements regarding finances of WorldCom to its customers netting around $45 million from stock sales. From 1998-2000, WorldCom reduced reserve accounts which were held to cover liabilities of the acquired companies by adding $2.8 billion to the revenue line from these reserves. Scott Sullivan, CFO had instructed the employees to record operating costs or "line costs", such as fees paid to third party telecom providers for the right to access the third parties network, to its Capital Assets Account which were to the tune of $3.85 billion.
The computer expenses were recorded as assets to the extent of $500 million in the journal, but documents supporting the expenses were not found. These costs were not recorded in the income statement as supposed to; hence ignoring them, increased WorldCom's net income as it was not reduced by the cost. The costs were added to the balance sheet, which is a totally different recording, as in the balance sheet they are recorded as assets and not as costs. Hence the balance sheet had shown an inflated increase in computer assets and leasing assets which were actually expenses. The liabilities were untouched which increased the retained earnings/shareholders equity to a large extent and from the perspective of the investor, portrayed a "HAPPY INVESTOR" image. In 2001, the net income was $1.28 billion which in turn inflated the company's value in its assets.
There was an air of discomfort looming in and around WorldCom. Suspicions arose as to whether the financials are being maintained in the right manner. Obscure tips were sent to the internal audit team. By the end of the first quarter of 2002, a report prepared by WorldCom's internal auditor and KPMG found that $2.86 billion of the EBITDA related charges occurred in 2000.In 2002, John Stupka, Senior VP complained to the internal audit about the $400 million he was asked to set aside by Scott Sullivan to boost WorldCom's income. On March 7, 2002 the Securities Exchange Commission (SEC) questioned WorldCom as to how they could make so much money when AT&T was in a fix. The Internal Audit started to look out for more information, and found that:
$2 Billion announced for capital expenditure were not authorized
The undocumented $500 million in computer expenses, were recorded as assets
Searching WorldCom's computers, Mr. Morse, an accountant found questionable entries to the extent of $2 billion
On June 14 2002, WorldCom's Audit committee was contacted by the Internal Audit Team, and internal auditor Cindy Cooper had come to know that there were no documents supporting numerous capital expenditures. The financial controller, Mr. David Meyer, admitted that the accounting treatment was wrong and the rules of GAAP had not been followed. Following which a series of events occurred :
June 20, 2002- The internal audit explains irregularities to the Audit Committee
Always on Time
Marked to Standard
June 25,2002- WorldCom admits it inflated profits by $3.8 billion over the past five years
June 26, 2002- A civil suit was filed against WorldCom and the trading of its stocks came to a halt, and later delisted from NASDAQ
On July 21, 2002, WorldCom, files for bankruptcy.
THOSE HELD RESPONSIBLE:
Evidence collected during the discovery indicated that Arthur Anderson, who were WorldCom's external auditors before and after the scam failed to verify WorldCom's treatment of acquisition reserves or line costs. Rather, it relied on the guidelines of the management. If Andersen had sought supporting documentation for various adjustments and entries, or reviewed WorldCom's ledgers, it would have discovered that WorldCom had no documentation to support many of the significant adjustments or the results reported in its financial statements and that Andersen would have uncovered the fraud if it had conducted the required review before issuing its audit. WorldCom's chief executive, John Sidgmore, blamed the company's former chief financial officer, Scott Sullivan, and the former controller, David Myers. The two were fired for claiming $3.8bn in regular expenses as capital investment in 2001.
POST FRAUD NEWS:
17,000 job cuts to save $1 billion.
WorldCom to write off $50 billion in intangible assets
WorldCom Inc. agreed to pay investors $500 million to settle civil fraud charges
Trying to secure loans
John Sigdmore, the new CEO replaces Ebbers
Renamed MCI in 2004
On March 2, 2004, Sullivan and Myers pleaded guilty for charges against fraud, and face 65 years in prison
January 2005- 10 former directors agreed to pay $54 mn to settle a shareholders suit.
It is clear from the WorldCom fiasco that the audit committee must control the operations of the internal audit department. WorldCom's audit committee allowed management to control the internal audit department and created an incentive structure that required the internal group to emphasize operational audits leading to an internal audit group that had neither the staffing nor funding to provide adequate information to the audit committee on financial reporting issues. To properly maintain the watchdog function of the internal auditor, he or she should not receive significant incentives based on profitability.
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Tran Mark, WorldCom Accounting Scandal, [Internet], Article history, guardian.co.uk, Accessed on 23/11/2009http://www.guardian.co.uk/business/2002/aug/09/corporatefraud.worldcom2
Ulick Jake, CNN/Money Staff Writer, WorldCom's financial bomb, New York, Accessed on 22/11/2009, http://money.cnn.com/2002/06/25/news/worldcom/index.htm
Radigan Joseph, WorldCom: Missed it by that much, [Internet], US, Accessed on 22/11/2009, http://www.cfo.com/article.cfm/3005948?f=search
Beltran Luisa, CNN/ Money Staff Writer, WorldCom Files largest bankruptcy, CNN Money, Accessed on 23/11/2009, http://money.cnn.com/2002/07/19/news/worldcom_bankruptcy/
Calcaterra. M. Regina, Member of BR&B WorldCom trial team, Notes from the WorldCom trial, [Internet], Accessed on 24/11/2009, http://www.barrack.com/media_center/documents/RC_Worldcom_Notes_2.pdf