Introduction
• The story of WorldCom began in 1983 when businessmen Murray Waldron and
William Rector sketched out a plan to create a long-distance telephone service
provider on a napkin in a coffee shop in Hattiesburg, Miss. Their new company,
Long Distance Discount Service (LDDS), began operating as a long distance
reseller in 1984. Early investor Bernard Ebbers was named CEO the following
year. Through acquisitions and mergers, LDDS grew quickly over the next 15
years. The company changed its name to WorldCom, achieved a worldwide
presence, acquired telecommunications giant MCI, and eventually expanded
beyond long distance service to offer the whole range of telecommunications
services. WorldCom became the second-largest long-distance telephone
company in America, and the firm seemed poised to become one of the largest
telecommunications corporations in the world. Instead, it became the largest
bankruptcy filing in U.S. history at the time and another name on a long list of
those disgraced by the accounting scandals of the early 21st century.
ACCOUNTING FRAUD AND ITS CONSEQUENCES
• WorldCom used questionable accounting practices and improperly recorded $3.8
billion in capital expenditures, which boosted cash flows and profit over all four
quarters in 2001 as well as the first quarter of 2002. This disguised the firm’s
actual net losses for the five quarters because capital expenditures can be
deducted over a longer period of time, whereas expenses must be subtracted
from revenue immediately.
• WorldCom also spread out expenses by reducing the book value of assets from
acquired companies and simultaneously increasing the value of goodwill.
• These accounting practices made it appear as if WorldCom’s financial situation
was improving every quarter. As long as WorldCom continued to acquire new
companies, accountants could adjust the values of assets and expenses. Even
before the improper accounting practices were disclosed, however, WorldCom
was already in financial turmoil. Declining rates and revenues and an ambitious
acquisition spree had pushed the company deeper in debt. The company also
used the rising value of their stock to finance the purchase of other companies.
• In July 2001, WorldCom signed a credit agreement with multiple
banks to borrow up to $2.65 billion and repay it within a year.
According to the banks, WorldCom tapped the entire amount six
weeks before the accounting irregularities were disclosed. The banks
contend that if they had known WorldCom’s true financial picture,
they would not have extended the financing without demanding
additional collateral.
• “The transfer of obvious expenses into capital expenditures is
absolutely fraudulent.”
Pressure to commit Frauds
