Worldcom Financial Crisis

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There are a lot of business firms established around the world and most successful business firms nowadays are Apple, Google, Amazon.com, Coca-Cola, and IBM. However, looking back to the early 2000s, the most prestigious and influential business firms were Enron, WorldCom, Tyco, HealthSouth and the like. Unfortunately, those business firms were bankrupt or almost went bankrupt because of accounting fraud. WorldCom was one of them. The analysis of the WorldCom’s accounting fraud illustrates who was responsible for this to happen and what were the effects during that time.

Before going in-depth, one should look at the history of MCI WorldCom. MCI WorldCom was first established as a Long Distance Discount Service, Inc. (LDDS) in 1983 in Jackson, Mississippi by Murray Waldron and William Rector. Murray Waldron was the one who stretched out the business plan, whereas William Rector was responsible for finding the budget to set up the business. He borrowed 640,000 USD from the local bank. Bernard Ebbers, the early investor of LDDS, became the chief executive officers in 1985. He met Jack Grubmen, a telecom analyst at PaineWebber. Jack Grubmen then became WorldCom’s adviser and attended the board meetings. In 1989, WorldCom became a public company, then started to hit it drastic change and became world most powerful telecom company in the United States in 1990s. In December 1994, this company was able to merge a lot of business corporations such as IDB WorldCom and Williams Telecommunication Group Inc. (WilTel). It then changed the company name from LDDS to WorldCom Inc. in 1995. One year after changing its name, WorldCom could incorporate other three large corporations such as MCI Communication Corp., Brooks Fiber Properties Inc., and CompuServe Corp. Because of its success, WorldCom could merge with other successful business firms like Spring Corp. and Intermedia Communication Inc. The company kept striving until 2002 [1] [2].

However, in May 2002, an unexpected event and crisis broke out in WorldCom. The accounting scandal of this company appeared as the headline of every newspaper in the United States and became the world’s most popular accounting fraud. This occurred when the Securities and Exchange Commission asked for the information of accounting procedure and loans. During that time, Cynthia Cooper, WorldCom’s vice president and internal audit, found out that the company intentionally recorded expenses as capital expenditure leading to the overstate of asset. It capitalized the service charge to lease local line, while it was obviously an expense. As the result, $3.8bn was recorded in asset rather than expenses. Because it was so conspicuous that the company wanted to record it that way, Robert A. Howell, a business professor at Dartmouth’s Tuck School said that “The transfer of obvious expenses into capital expenditures is absolutely fraudulent. There’s no excuse for this kind of misrepresentation. Almost everyone in the industry would agree that if you’re paying a service charge to lease local lines, that’s a clear expense.”[3] Not only that the company misused the capitalizing of expenses, but the company also wrote down or transferred the reserves to the revenues making the company understated expenses and overstated revenue. [4] In short, WorldCom’s accounting fraud occurred because the company intentionally misused the capitalizing of expenses and transferred reserves to revenues.

The reason behind the intentional misused of capitalized expense was because in 2000, the WorldCom’s stock market was declined. Hence, in order to meet with Wall Street’s expectation and get more investment, WorldCom needed to have more revenues and less expense before declaring earnings to the public. Under this pressure, Scott D. Sullivan decided to tell Vinson and Normand to capitalize expenses. He thought this problem could be solved and by doing so, the company could meet Wall Street’s expectation and able to sustain. Being told to wrongly capitalize expenses, Vinson and Normand knew that it was fraud, but they decided to do according to what their CFO told them because they wanted to keep their job. As time went by, Sullivan could not find ways to fix the problem. The solely way that he could do was to Cooper to postpone her internal audit. Having no solution, Sullivan decided to tell Cooper the truth that it was difficult to stop. Cooper along with her internal auditing team decided not to play along and became the whistle blower. In short, the pressure of meeting Wall Street’s expectation was the reason behind WorldCom’s scandal. [4]

After the new of WorldCom broke out and the reason behind this was known to the public, Scott Sullivan, the company’s former chief financial officer, and David Myers, the former controller, was accused of committing fraud and was charged to be in prison for 65 years. For Bernie Ebbers, the founder and former chief executive, he asserted knowing nothing about accounting fraud in the company. [5] However, he was found guilty of fraud in March 15, 2005 and was sentenced in prison for up to 85 years. [2] Other members involved in WorldCom’s accounting scandal were Buford Yates, director of accounting, Betty Vinson, director of corporate accounting, and Tory Normand, an accountant in WorldCom. [6] [7]Kenneth Avery and Melvin Dick, auditors from Anderson, were commended to stop practicing accounting for 4 years. [8]To conclude, there were a lot of people who involved in this accounting fraud and all of them were sentenced in prison.

WorldCom’s accounting fraud brought about a lot of consequences. One of the consequences was approximately 30,000 WorldCom’s employee lose their job and investors who invested in the company also lost huge sum of money. Moreover, AT&T, the company’s competitor, also lost some of it employees because before WorldCom’s scandal broke out, it fired some of its employees. Moreover, WorldCom’s scandal also put the suppliers in the risk because they stopped getting paid. Furthermore, WorldCom was no longer stand as a successful business firm; it was bought by Verizon in 2006.

In conclusion, WorldCom’s scandal was one of the biggest scandals of all time. The reasons behind this were because the company decided to wrongly capitalize expense and transfer reserves like allowance for doubtful account to revenues. They did that because they wanted to meet the expectation of Wall Street’s expectation. This scandal brought about a lot of consequences such as the majority of the people lost it jobs, the investors and suppliers lost it money, and AT&T lost it employees. Furthermore, CEO, accountants and other people who worked in WorldCom was faced sentencing in jail.

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