Chronology of Events at WorldCom
The following is a chronology of key events in the history of WorldCom, which changed its
name to MCI when it emerged from bankruptcy:
1983 - Businessmen Murray Waldron plan to create a discount long-distance provider called LDDS
(Long Distance Discount Service). Early investor Bernard Ebbers becomes chief executive officer of
LDDS two years later.
(Murray Waldron sketches out the details of what will become LDDS (Long Distance Discount
Service) and then Ebbers and some church buddies obtain a $650,000 loan from a local bank to buy a
computer switch to route long distance calls. Because AT&T is under court order to lease its phone
lines cheaply to start-ups, LDDS is able to acquire small businesses.
The company expands by following a strategy in which it buys up regional rivals, using LDDS stock as
currency. Within 10 years, Ebbers has purchased 30 companies and LDDS sales reach nearly $1
billion. LDDS is renamed WorldCom in 1995.)
1995 - LDDS acquires Williams Telecommunications Group Inc. (WilTel) for $2.5 billion cash and
changes its name to WorldCom Inc.
1998 - WorldCom completes three mergers:
1. MCI Communications Corp. ($40 billion) -- the largest in corporate history at the time
2. Brooks Fiber Properties Inc. ($1.2 billion)
3. CompuServe Corp. ($1.3 billion).
1999 - WorldCom and Sprint Corp. agree to merge but U.S. and European regulators blocked the
proposed merger with Sprint; deal is terminated.
-Regulators were concerned that the merging of two large telecom. Company would stop the
competition. It would make Worldcom the biggest company and it would be too difficult to compete
with them and small businesses might be affected…
In 2001, Worldcom attempted to inflate its earnings numbers by nearly $4 billion.
*SCANDAL starts here….EXPLAIN
April 30 - WorldCom CEO Bernard Ebbers resigns amid SEC probe of the company's support of
more than $400 million in personal loans.
June 25 - WorldCom fires Chief Financial Officer Scott Sullivan.
June 26 - SEC files fraud charges against the company.
July 21 - WorldCom files for Chapter 11, the largest bankruptcy in corporate history.
*CHAPTER 11- this chapter of the bankruptcy code generally provides for reorganization, usually
involving a corporation or a partnership.
- ang may utang ay napo-propose ng plano para mapayagan sila legally na mag-operate para
mabayaran ang kanilang pinagkakautangan. Dahil kung bankrupt ang isang company, maari
itong maipasara pero dahil dito pwede pa silang mapayagan na mag-trabaho at mabigyan ng
chance para maisalba ang kompanya. Ginawa din itong batas na ito para maprotektahan ang mga
debtors sa mga harassing creditors…
- the business can continue to operate while paying debts.
Aug. 1 - Ex-CFO Sullivan and former Controller David Myers are arrested and charged in a seven-
count complaint accusing them of securities fraud and filing false statements with the SEC.
*PEOPLE INVOLVED EXPLAIN…
MONEY INVOLVED EXPLAIN….
RECOVERING FROM BANKRUPTCY….
April 14 - WorldCom plans to change its name to MCI upon emerging from bankruptcy.
(*MCI was acquired by worldcom in 1998. It changed to MCI Inc. in 2003 as part of the
corporation's ending of its bankruptcy status.)
Oct. 31 - Bankruptcy court judge approves MCI's reorganization plan, clearing the way for the
company to emerge from bankruptcy.
2004
March 3 - Ebbers pleaded innocent to criminal charges related to MCI's $11 billion fraud. Charges
against him included fraud, conspiracy and making false statements in connection with the
accounting scandal.
April 2 - The company agrees to pay $27 million to settle charges that it overbilled the U.S.
government for telephone services.
April 20 - MCI exits bankruptcy, minus the infamous WorldCom name, and with about $5.7 billion
in debt and $6 billion in cash.
July 9 - MCI files a lawsuit against its former chief executive Bernard Ebbers to recover more than
$400 million in loans and interest.
2005
Feb 28 - Ebbers takes witness stand in his criminal trial and denies playing any role.
March 15 - Ebbers found guilty by a federal jury of fraud, conspiracy and filing false documents with
regulators. He faces up to 25 years in prison.
PEOPLE INVOLVED IN THE FRAUD…
Bernie Ebbers
WorldCom CEO Bernard Ebbers was sentenced to 25 years in jail for his role in the scandal
CEO Bernard Ebbers, who received a 25-year sentence (the maximum sentence that Sullivan could
have received if he had not accepted the plea agreement and was found guilty).
Scott D. Sullivan
Pinagtakpan niya yung bankruptcy. kapag natapos ng accountants yung kanilang reports, ipapasa nila
sa mas mataas ang posisyon at sa kanya yun. Pagkatapos dumaan sa kanya, napapalitan at
nababaligtad yung ibang account entries, kaya imbis na lumabas na bankrupt na sila, ang lumalabas
mas nag-e-earn pa sila.
He was also aggressive and told Cynthia cooper to not be involved on their way of checking the
accounting reports.
Sullivan pleads guilty to criminal charges of conspiracy, fraud and making false
statements about WorldCom's financial health to regulators. Sullivan also resolved
charges filed against him by the SEC and agreed to a lifetime ban of being an officer of a
publicly traded company. Sullivan agrees to cooperate in the government's probe against
former Chief Executive Bernard Ebbers.
In 2002, WorldCom learned of improper accounting at the company. Sullivan was asked to resign by
the company's board of directors; he refused, and was fired. In August of that year, Sullivan was
arrested and charged with seven counts related to fraud at WorldCom.
Sullivan admitted he was guilty and was sentenced to five years in prison as part of a plea agreement
in which Sullivan testified against Bernard Ebbers,
Sullivan was released from jail in August 2009, after serving four years of his sentence.
CFO-responsible for managing the financial actions of a company.
Controller- Guides financial decisions by establishing, monitoring, and enforcing policies and
procedures.
Vp of internal audit- It is concerned with evaluating and improving the effectiveness of risk
management, control and governance processes in an organisation.
It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of riskmanagement, control, and governance processes." In
simplest terms, the duties of an internal auditor are to: Objectively review an organization's business
processes.
David Myers, (former controller)
Pinagtakpan niya yung fraud sa pagbigay ng maling documents sa SEC ng US,
hindi tumutugma sa mga accounting entries
walang proof or evidence na nagpapatunay na tama ang mga ipinaglalagay ng mga accounting
entries..
..pataasin ang kanilang asset kahit na alam niyang wala naman siyang basehan para
magpapatunay ditto.
Sabi ni Myers. "I was instructed by senior management to make entries in WorldCom's books
to increase WorldCom's earnings.” Sabi niya sumusunod lamang siya sa mg utos ng mga boss
kaya niya nagawa iyon.
became the first person to plead guilty in the scandal.
Mr Myers entered the plea to three charges of fraud, conspiracy and filing false documents.
Sentence jail: 1 year and 1 day
She discovered some suspicious entries in the company's books. She discovered the reversing accounting
entries.
Cooper and her team of auditors worked together and often at night and in secret to investigate the fraud
at WorldCom.
At doon na nila nakita na sobrang bankrupt na pala yung company..
Sabi niya..matagal ng bankrupt yung company pero pinagtakpan lang nila iyon sa pamamagitan ng fraud na ito.
HOW THE FRAUD HAPPENED: The Worldcom Scandal Explained
In 2001, Worldcom attempted to inflate its earnings numbers by nearly $4 billion.
It did this by manipulating its financial statements, particularly the income
statementand balance sheet, Form 10-K filing and annual report. It did this through the
machinations of upper management. (Sullivan, Myers and other accounting heads. To grasp
how this happened, you need to understand how Chief Financial Officer Scott Sullivan treated
capital expenditures and expenses as well as something known as the accrual method, which
is a basic principle of accounting.)
To Explain the Worldcom Scandal, I Need To Teach You About the Accrual Method
When a business incurs an expense, accounting rules state that the cost of that expense should be
allocated over the entire period it will benefit the company. This attempt to match revenues with the
cost it took to generate those revenues is known as the accrual method. An illustration from Investing
Lesson 4 will help:
Sherry’s Cotton Candy Co., earns $10,000 profit a year. In the middle of 2002, the business
purchases a $7,500 cotton candy machine that is expected to last for five years, and will allow the
employees to make twice as much cotton candy per hour. If an investor examined the financial
statements, they might be discouraged to see that the business only made $2,500 at the end of 2002
($10k profit - $7.5k expense for purchasing the new machinery.) The investor would wonder why the
profits had fallen so much during the year.
Thankfully, Sherry’s accountants come to her rescue and tell her that the $7,500 must be allocated
over the entire period it is going to benefit the company. Since the cotton candy machine is expected
to last five years, Sherry can take the cost of the cotton candy machine and divide it by five ($7,500 /
5 years = $1,500 per year.) Instead of realizing a one-time expense, the company can subtract
$1,500 each year for the next five years, reporting earnings of $8,500. This allows the investor to get
a more accurate picture of the company's economic reality.
In the example, the purchase of the cotton candy machine is a type of capital expenditure. Capital
expenditures are expenses that a company incurs to pay for assets such as a factory, machinery, or
equipment. This accrual method of accounting for capital expenditures does not apply to operating
expenses such as materials, salaries, office supplies and the like.
How does this apply to Worldcom?
The company's CFO, Scott Sullivan, fraudulently took billions of dollars in operating
expenses and spread them out across so-called property accounts, which are a type capital
expense account. This allowed Worldcom to charge the expenses off slowly, and in smaller
amounts, instead of reporting them immediately to investors. In 2001, the company reported a
$1.4 billion profit. Had the operating costs not been incorrectly hidden, Worldcom would have
lost money for fiscal 2001 as well as first-quarter 2002.
This was not a sophisticated fraud. To hide its falling profitability, WorldCom had simply
inflated net income and cashflow by recording expenses as investments.
By capitalizing expenses it exaggerated profits by around $3 billion in 2001 and $797 in Q1
2002, and reported a profit of $1.4 billion instead of a net loss.
