June 2002 Issue 1
The FRAUDULENT
BERNIE
EBBERS
Even the greatest falls when
it forgets the ground.
Contents
3
Background
WorldCom growth
through acquisition
6 Scandal
How did the WorlCom
14
fraud happened ?
WorldCom bankcruptcy
WorldCom Financial
Statement
Topic relations
How this scandal can
be related with what
we learn in class
16
Recommendations
17
What can we do to
prevent accounting
fraud
Conclusion
Lessons to learn from
this scandal 18 References
1
Centre for Foundation
team members Studies UNIRAZAK
EDITOR-IN-CHIEF ART DIRECTION
Nurul Syamila Zulfawzy
MANAGING EDITOR PHOTOGRAPHERS
Nurul Hannah Alya Maisarah
CONTENT DIRECTOR CONTENT DIRECTOR
Nanthini Anrisa
2
WorldCom
BACKGROUND
3
Growing through acquiring
I n 1983, WorldCom
was founded. Originally
Worldcom expanded
quickly in the 1990s,
But by 2000, the
telecom markets had
known as Long Distance mostly as a result of taken a dramatic
Discount Services, Inc., acquiring a wide range decline. Furthermore,
the long distance of bigger businesses. additional noteworthy
telephone company was According to Beresford expansion through
founded by Murray et al. (2003), the acquisition was
Waldron, William company's rapid growth constrained by
Rector, and early as an integrated antitrust concerns.
investor Bernard Ebbers. telecoms service According to
At one point, WorldCom provider resulted in a Beresford et al.
was one of the largest high market valuation, (2003), internal
long-distance carriers in making its shares a development became
the United States. valuable tool for future the main strategy for
Through a merger with acquisitions. maintaining revenue
Advantage Companies, growth in light of this.
Inc. in 1989, they went
public (Beresford et al.,
2003).
4
WorldCom in the 1990s: Growth Through Acquisitions
Limeted Distance Data Service (LDDS) competed
with major carriers AT&T, MCI and Sprint. LDDS
grew by purchasing small companies like MidAmerican,
AmericaCall,FirstPhone,ATC,WorldCommunications,
DialNet and TRT Communications. LDDS completed
additional merges with Metromedia Communications
and Resurgens Communications Groups worth $1.3
billion in the aggregate (Beresford et al., 2003).
LDDS officially became known as WorldCom after a shareholder
vote on May 25, 1995. With acquisitions, WorldCom persisted in
expanding and diversifying its company rapidly, frequently utilizing
its common shares as payment. It paid $936 million for IDB
Communications Group at the end of 1994, and $2.5 billion for
WilTel at the beginning of 1995 (Beresford et al., 2003).
These purchases led WorldCom's stated revenues to skyrocket.
In the 23 quarters between the first quarter of 1994 and the third
quarter of 1999 (the quarter before MCI's growth was fully absorbed),
WorldCom's year-over-year revenue growth was greater than 50% in
sixteen of them, and less than 20% in only three. This revenue growth
resulted in a constant increase in demand for WorldCom common
shares (Beresford et al., 2003).
5
The colllapse of
the 2nd largest
telecommunication
company in the US
.
WorldCom
Scandal
6
How did the WorldCom
fraud happened ?
T he second-largest long-
distance telecom
provider in the US
It was handling half of
the email and internet
traffic in the US by
As a result, they try to
disguise its subpar
performance and give
With Ebber's approval,
WorldCom's CFO,
Sullivan, and controller,
acknowledged 2001 (International the impression that it David Myers, are
overstating its Banker, 2021). For the has met Wall Street primarily responsible
profitability by June acquisition plan to be expectations by for this scam.
2002, mostly as a result successful, the falsifying its financial All because the
of recording payments company's stock price statements and company was unable to
it made for using other needed to keep rising "hiding" its operating meet Ebbers's financial
firms' communications steadily. The plan expenses as long-term expectations, Sullivan
networks as capital appeared to be working capital investments. proceeded to fabricate
expenditures rather until the beginning of accounting entries to
than operating 1999. As a result, the suggest that those goals
expenditures amount it had in were accomplished with
(International Banker, But that year, reserve was lowered by Myers' assistance.
2021). WorldCom's revenue $2.8 billion, and the
growth began to money was reclassified When WorldCom's
WorldCom had decelerate, which as revenues. fourth-quarter 2001
continuously "cooked resulted in a drop in the WorldCom made an profitability report
the books," including company's stock price. additional $3.85 billion came in far lower than
its income statement, This might be brought in profit as a result of Wall Street had
balance sheet, Form on by the enormous the reclassifications; anticipated in February
10-K filing, and annual excess of US telecom however, the 2002, WorldCom was
report, in an effort to networks available at company's assets were forced to reduce its 2002
inflate its profit-and- the time, which grossly overstated, and guidance. After that,
loss situation by an outpaced demand its earnings were only rating agencies
astonishing $3.8 because of inflated reported at $1.38 downgraded
billion, even though predictions about the billion. Using this WorldCom, and its debt
top management was internet's rapid strategy, WorldCom was placed at junk
well aware of the fraud expansion(Internationa continued to exceed status by Moody's in
being committed l Banker, 2021). Wall Street May (International
(International Banker, Executives at expectations while Banker, 2021).
2021). It turned out to WorldCom, the misrepresenting itself
be one of the biggest second-biggest telecom to the public and its
bankruptcies ever filed corporation in the US, employees as a
and the worst were deeply worried successful business.
accounting fraud in US that their earnings
history. would fall short of
7
Wall Street projections.
During the The downgrade also From the finding, they The business declared
investigation, they find intrigued WorldCom's decided to file a report bankruptcy a few
many inconsistencies Internal Audit regarding the fraud to weeks later, just before
such as “the use of Committee to also Audit Committee of it was discovered that
reserves to boost the reviewed the company's the board. Once the an extra $3.831 billion
company's income, the capital expenditures Audit Committee in earnings had been
company's capital despite Sullivan and found out about this, falsely reported.
expenditures and Myers' objections. they immediately fired Soon, the SEC filed a
complicated accounting Cynthia Cooper, who is Sullivan and Myers. lawsuit against
terms (such as prepaid the WorldCom vice WorldCom.
capacity), which were president of internal After that, WorldCom Additionally, hearing
used to hide the audit department at revealed to the public were held by the Senate
movement of capital” that time notice and the U.S. Securities Committee on
(Hayes, 2023) .Not only significant and Exchange Commerce, Science,
that, they also inconsistencies, so, she Commission (SEC) and Transportation as
conducted an audit went and reach out to that it had discovered well as the House
which Sullivan, the an internal auditor, there is certain Committee on
CFO asked them to Gene Morse to do a transfers totaling Financial Services . It
delay it, and this thorough examination $3.852 billion were not turns out to be that
confirmed their on the accounting done in compliance WorldCom produced
suspicion that there is a reports on their own. with generally accepted more than $9 billion in
fraud going on. accounting principles fraudulent accounting
(GAAP). entries to give the
appearance it was
profitable.
8
Making it at the
time one of the
largest accounting
worldcom scandals in the
United State.
bankcruptcy
A fter the scandal
unraveled, WorldCom no
This scandal has led
Bernard Ebbers (CEO of
longer continued their WorldCom company) to
operations. It has been face nine counts of
found that from the year security fraud and 25
1992 untill 2002, years in prison in 2005.
WorldCom had adjusted Meanwhile, WorldCom
their profits to a CFO, Scott Sullivan
whooping $11 billion, but faced 5 years of prison
the fraud according to after pleading guilty and
experts was estimated to testifying agaisnt Ebber.
be $79.5 billion. They had
no choice but to file for
bankcruptcy and on July
21,2002,WorldCom
finally filed their
bankcruptcy .
9
WorldCom’s
Financial
Statement
10
Cash Flow
11
Income Statement
12
Balance sheet
13
topic relations
with
accounting 14
topic
rELATIONS
T he concept
‘substance over form’
can be related to the
WorldCom scandal.
Substance over form
means that financial The concept of
events should be ‘consistency’ can also
presented in the be associated to this
financial statement in scandal. Consistency
line with their real and means similar items
actual impact. should be treated the
same way within one
WorldCom has made set of financial
incorrect and statements, and a
inaccurate entries into chosen particular
their financial report method must remain
causing their investors consistent from one
into thinking that period to another.
WorldCom has an
excellent financial In WorldCom scandal,
statements, when the company
they’ve intentionally consistently use
manipulated their fraudulent methods,
financial report. making it difficult for
investors to understand
the true financial
statement.
15
Recommendation
From this case, we can learn that
there are weaknesses in auditing
WorldCom’s financial statements.
It has been known that during the
time, there were only two auditor
which is the internal auditor,
Cynthia Cooper and the external,
Arthur Andersen. Cynthia was the
one who expose the accounting
fraud committed by WorldCom.
She assembled a team of auditors
to began investigating. This
happened due to receiving
anonymous tip that there were
irregularities at WorldCom’s
financial statement. From our
perspective, we recommend that
government impose stricter Apart from that, we
regulations in auditing private recommend that internal
business during the yearly taxation auditor uses software or A.I to
auditing. The regulation could be detect possible warning of
such as private business must let all fraud. This can reduce the
of their transaction and dealings to accounting fraud attempts by
be public and accessible by the recognizing the revenue and
government. cost patterns of the company
throughout the year. If there’s
fluctuation of revenue without
reasonable cause or financial
transaction that has no
historical receipt to back up the
transaction, the system would
warn the auditor for for
possible fraud and manual
inspection upon the company’s
financial statement is required.
On top of that, fraud-detection
tools can help identify if a
certain document has been
altered. This can prevent
alteration of figures in financial
documents. Thus, limiting the
chances of fraud to be
conducted.
16
Conclusion
A s
WorldCom
in chronology,
scandal
Moreover, the
consequences served a
Lastly,this scandal
teaches us that being
deception is a massive charge against honest and responsible is
corporate financial crisis in WorldCom with civil just as important to make
the US. Although several fraud crime and the money for a company to
impacts might have CEO, thrive in the long run and
collapsed in the financial Bernie Ebbers and the companies should really
report which contributes to CFO, Scott Sullivan create a culture where
the unethical issue of was indicted charges of integrity is most valued.
fraudulent. The financial fraudulent. These “WorldCom's example
statements depict that caused failure in the helped corporate
WorldCom had grown economy in WorldCom management teams and
dramatically by overstating company. investors learn a valuable
profit, resulting in lesson: If something
bankruptcy. looks too good to be
true, it probably is”.
(Hayes, 2023)
17
References
Ashraf, J. (2011).he accounting fraud at WorldCom the causes, the characteristics, the consequences, and
the lessons learned. https://stars.library.ucf.edu/honorstheses1990-2015/1107
Baird, H. & Sawayda, J.(n.d.)WorldCom's Bankruptcy Crisis. Auburn University.
https://harbert.auburn.edu /binaries /documents/center-for-ethical-organizational-
cultures/cases/worldcom.pdf
Hayes, A. (2023 August, 29). The Rise and Fall of WorldCom: Story of a Scandal. https://
www.investopedia.com/terms/w/worldcom.asp#citation-1
International Banker. (2021b, September 29). The WorldCom Scandal (2002). https://
internationalbanker.com/history-of-financial-crises/the-worldcom-scandal-2002/
Johnson, T. (2023, April 27). WorldCom scandal: The collapse of a company due to poor risk
management.https://www.piranirisk.com/blog/worldcom-scandal-the-collapse-of-a-company-due-to-poor-
risk-management
Momin. (n.d.). WorldCom Financials 2000 2002 a.Scribd.https://www.scribd.com/document/
243330905/Worldcom-Financials-2000-2002-A
Report of investigation. (n.d.). https://www.sec.gov/Archives/edgar/data /723527/ 0000931763
03001862/dex991.htm#ex991902_47
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