Worldcom

imploded in accounting scandal?

http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html
===
In 1998, the telecommunications industry began to slow down and

WorldCom's stock was declining. CEO Bernard Ebbers came under increasing

pressure from banks to cover margin calls on his WorldCom stock that

was used to finance his other businesses endeavors (timber, yachting,

etc.). The company's profitability took another hit when it was forced

to abandon its proposed merger with Sprint in late 2000. During 2001,

Ebbers persuaded WorldCom's board of directors to provide him corporate

loans and guarantees totaling more than $400 million. Ebbers wanted to

cover the margin calls, but this strategy ultimately failed and Ebbers

was ousted as CEO in April 2002. Beginning in 1999 and continuing

through May 2002, WorldCom (under the direction of Scott Sullivan (CFO),

David Myers (Controller) and Buford Yates (Director of General

Accounting)) used shady accounting methods to mask its declining

financial condition by falsely professing financial growth and

profitability to increase the price of WorldCom's stock. The

fraud was accomplished in two main ways. First, WorldCom's accounting

department underreported 'line costs' (interconnection expenses with

other telecommunication companies) by capitalizing these costs on the

balance sheet rather than properly expensing them. Second, the company

inflated revenues with bogus accounting entries from 'corporate

unallocated revenue accounts'. The first discovery of possible

illegal activity was by WorldCom's own internal audit department who

uncovered approximately $3.8 billion of the fraud in June 2002. The

company's audit committee and board of directors were notified of the

fraud and acted swiftly: Sullivan was fired, Myers resigned, and the

Securities and Exchange Commission (SEC) launched an investigation. By

the end of 2003, it was estimated that the company's total assets had

been inflated by around $11 billion (WorldCom, 2005). 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 with about $5.7 billion in debt. At last

count, WorldCom has yet to pay its creditors, many of whom have waited

years for the money owed. On March 15, 2005 Bernard Ebbers 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. Other former WorldCom officials charged with criminal penalties

in relation to the company's financial misstatements include former CFO

Scott Sullivan (entered a guilty plea on March 2, 2004 to one count each

of securities fraud, conspiracy to commit securities fraud, and filing

false statements), former controller David Myers (pleaded guilty to

securities fraud, conspiracy to commit securities fraud, and filing

false statements on September 27, 2002), former accounting director

Buford Yates (pleaded guilty to conspiracy and fraud charges on October

7, 2002), and former accounting managers Betty Vinson and Troy Normand

(both pleading guilty to conspiracy and securities fraud on October 10,

2002) (MCI, 2006). Ebbers reported to prison on September 26, 2006 to

begin serving his sentence. Works Cited<pre>(2007, January 31). MCI Inc.. Retrieved February 17, 2007 from Wikimedia Foundation, </pre><pre> Inc. Web site: http://en.wikipedia.org/wiki/Worldcom</pre><pre>(2005, July 13). Worldcom's ex-boss gets 25 years. Retrieved February 17, 2007 from </pre><pre> British Broadcasting Corporation Web site:</pre><pre> http://news.bbc.co.uk/1/hi/business/4680221.stm</pre>