What was WorldCom?
An American telecom corporation was called WorldCom. WorldCom was one of the biggest long-distance carriers in the U.S. at one point. The company’s most well-known involvement is in one of the worst accounting scandals in the nation, which followed the Enron and Tyco scams. This happened when it was discovered that the business had falsified its financial records. In addition, WorldCom was a part of one of the most prominent bankruptcy cases ever. After emerging from bankruptcy, the firm changed its name, and Verizon purchased its network assets.
Understanding WorldCom
These days, WorldCom is synonymous with accounting fraud and serves as a cautionary tale to investors about the possibility that something is not what it seems. The business was first established as a long-distance discount service in 1983.
Murray Waldron, William Rector, early investor Bernard Ebbers, and their business associates founded it after the split of AT&T. With the help of a $650,000 loan, the organization could purchase the equipment needed to route long-distance calls.
The company’s CEO, Ebbers, could provide meager prices to his clients because courts had mandated that AT&T lease its phone lines to new businesses at low costs. This allowed him to buy up to thirty other telecom firms, turning the company into one of the top long-distance phone providers in the United States. WorldCom had a $175 billion market value during the height of the dot-com bubble.
To keep up the illusion of steadily increasing profitability, WorldCom turned to accounting techniques as the tech bubble collapsed and businesses cut expenditures on telecom services and equipment. By then, many investors had started to doubt Ebbers’ account, particularly after the Enron affair that surfaced in the summer of 2001.
Shortly after Ebbers was forced to resign as CEO in April 2002, it was discovered that he had taken out a $408 million loan from Bank of America in 2000, using his WorldCom shares as security to pay for margin calls. As a consequence, Ebbers lost his riches. He was found guilty of securities fraud in 2005 and given a 25-year jail term.
Ebbers was a legendary person known for his cowboy boots and ten-gallon hat.
Preparing the Book
WorldCom suffered a loss due to many circumstances. The business actively sought acquisitions, acquiring competitors’ businesses to increase its market share. This resulted in a significant decline in sales and rates, further damaging the business. Executives required a plan to convince the board and shareholders that WorldCom was still financially viable.
WorldCom used several dubious accounting practices to conceal its financial situation, inflating its earnings. This resulted in incorrectly accounting for billions of dollars worth of capital expenditures. However, this was by no means a clever scam.
WorldCom recorded costs as investments to increase net income and cash flow, concealing declining profitability. It reported a profit of $1.4 billion instead of a net loss by capitalizing costs, inflating earnings by $3.8 billion in 2001 and $797 million in the first quarter of 2002.
WorldCom recorded costs as investments to inflate its net income and cash flow and conceal its declining profitability. As a result, it reported a $1.4 billion profit rather than a net loss in Q1 2002.
The Blowers of Whistle
Several people were instrumental in bringing the WorldCom scandal to light. Among them were Gene Morse, another auditor, and Cynthia Cooper, vice president of WorldCom’s internal audit division. They started to notice other discrepancies in the business’s financial records, such as:
Using reserves to increase revenue for the business
The business’s capital expenditures, over which a different employee raised concerns and was let go
complex accounting terminology that was utilized to conceal the transfer of money, such as prepaid capacity
the absence of proof for certain financial transactions, such as a $500 million capital investment
Cooper and Morse carried out an audit in addition to independent investigations. The corporation’s chief financial officer (CFO), Scott Sullivan, questioned them and asked them to postpone the procedure. They contacted WorldCom’s audit committee and KPMG, the external auditor that took over from Arthur Andersen.
Cooper’s dedication won her the title of Person of the Year from Time, and the publication even put her on its cover in 2002. She currently works as a consultant, author, and speaker who is well-known worldwide.
WorldCom’s Insolvency
Once things began to go wrong, the firm was unable to continue. In actuality, WorldCom had to make $11 billion in profit adjustments for the ten years from 1992 to 2002, and the scam was estimated to have cost about $79.5 billion.
There was just bankruptcy as a choice. On July 21, 2002, just one month after its auditor Arthur Andersen’s departure, WorldCom filed for Chapter 11 bankruptcy. The corporation owed its creditors as much as $7.7 billion. In its filing, the corporation reported $107 billion in assets and $41 billion in debt.
WorldCom was able to make some compensation because of the filing. By doing this, services might be continued for current clients. In addition, WorldCom could maintain its assets and pay its staff. Though it lost its appeal in the business world, it also gave much-needed time for restructuring.
Aftereffects and Fallout
Due to their participation in the company’s accounting controversy, several essential employees, including:
In 2005, Bernard Ebbers was found guilty of nine securities fraud charges and sentenced to 25 years in prison. On December 18, 2019, he was given an early release from jail due to health concerns, having completed his 14-year term.
After admitting guilt and providing evidence against Ebbers, former CFO Scott Sullivan was sentenced to five years in prison.
Debtor-in-possession financing from Citigroup, J.P. Morgan, and G.E. Capital enabled the company to survive. After coming out of bankruptcy in 2004, it changed its name to MCI, the telecom business that WorldCom had purchased in 1997. In 2006, Verizon acquired MCI’s assets.
The former banks of Worldcom paid $6 billion to resolve litigation with creditors without acknowledging any wrongdoing. Bondholders received around $5 billion, with the remaining amount going to previous stockholders.
The newly established MCI agreed to pay stockholders and bondholders $500 million in cash and $250 million in MCI shares as part of a settlement with the Securities and Exchange Commission (SEC). Verizon Communications purchased MCI and all of its network assets in January 2006.
The Sarbanes-Oxley Act was passed in July 2002, and enhanced disclosure standards and penalties for false accounting directly resulted from the wave of corporate criminality.
Accounting businesses, investment banks, and credit rating organizations permanently damaged their reputations due to WorldCom.
Who was at fault?
Despite no one formally acknowledging their involvement, several people—some of whom worked for WorldCom and others who did not—were involved in the controversy.
The accounting firm Arthur Andersen, which examined WorldCom’s records for the first quarter of 2002 and audited the company’s 2001 financial statements, was discovered to have disregarded memoranda from WorldCom officials alerting them to the company’s misrepresentation of expenditures to inflate earnings.
The company’s board of directors, internal audit team, WorldCom CEO Bernie Ebbers, and CFO Scott Sullivan, among other key management individuals, were also pointed out for not monitoring and adhering to accounting rules. At first, Ebbers and his attorney denied any knowledge of or participation in the scam. A Wall Street Journal investigation that alleged internal messages to the contrary disputed these assertions.
Jack Grubman, a Wall Street analyst, frequently awarded the business good ratings despite its dismal performance relative to other carriers. Grubman lost his job at Salomon Smith Barney and received a $15 million fine from the SEC. He was also prohibited from using stock exchanges for any purpose.
What was the status of WorldCom?
WorldCom was a telecom provider that offered its clients affordable long-distance services. Due to its involvement in one of the worst accounting scandals in U.S. history, the corporation filed for bankruptcy on a similarly massive scale. The corporation made itself seem more lucrative than it was by using dubious accounting techniques to conceal its losses. Many people reported the irregularities to the authorities for fear of fraudulent money activities. The company’s bankruptcy assisted in its restructuring and MCI rebranding. Verizon purchased this new company in 2006.
Who Was a Part of the WorldCom Controversy?
In the WorldCom affair, there were several significant players. Among the most well-known figures are the company’s CFO, Scott Sullivan, CEO Bernie Ebbers, and auditing firm Arthur Andersen. A Wall Street analyst, Jack Grubman, also contributed to the telecom business receiving favorable ratings.
Cynthia Cooper played a pivotal role in drawing attention to the financial irregularities inside the organization. Cooper looked into and revealed WorldCom’s dubious accounting methods with auditor Gene Morse. In 2002, Time named her Person of the Year.
What is the status of Cynthia Cooper?
Most of the credit for drawing attention to WorldCom’s dubious accounting methods goes to Cynthia Cooper. She brought the company’s board and auditors’ attention to the discrepancies she found in the financial statements. In her writing. According to Cooper’s book Extraordinary Circumstances: The Journey of a Corporate Whistle-Blower, it was a challenging period for her career. However, in, in 2002, Time recognized her as a Person of the Year.
She currently works as a consultant and speaker.
Cynthia Cooper, “Biography.”
The Bottom Line: WorldCom was a telecom provider that was very satisfied with offering reasonably priced long-distance services to its clients. However, the company’s aggressive acquisition strategy and declining sales turned it into a tailspin, eventually allowing one of the worst accounting frauds and bankruptcies in U.S. history. The business concealed its losses by using dubious accounting methods to give the impression that it was more lucrative than it was, which allowed it to continue being a favorite among investors. WorldCom was able to reorganize and come out of bankruptcy. Still, its story taught investors and corporate management teams an important lesson: if something seems too good to be true, it usually is.
Its founding investors were Bernard Ebbers, William Rector, and Murray Waldron.
Conclusion
- WorldCom was a telecommunications business founded in 1983.
- The business offered its clients low-cost, long-distance services and had a bold acquisition strategy that helped it become the biggest of its type in the U.S.
- WorldCom, a company in financial distress, utilized questionable accounting practices to conceal its losses from investors and other stakeholders.
- The controversy caused the firm to declare bankruptcy, and many essential individuals—including the CEO and CFO—were fired.
- After restructuring and emerging from bankruptcy, WorldCom was acquired by Verizon.
