McI Worldcom Accounting Scandal
By: grad123 • Research Paper • 1,142 Words • April 28, 2011 • 1,346 Views
McI Worldcom Accounting Scandal
WorldCom, originally Long Distance Discount Services (LDDS) was formed in 1994 with the take over of several telecommunications companies including Communications Group, Inc, and WilTel Network Services (Funding Universe, 1999). WorldCom's CEO Bernard Ebbers, who had also been LDDS's CEO since 1985 had a history of acquiring other telecommunications companies, which paid off in 1998 with the $37 billion purchase of MCI (Funding Universe, 1999). The two companies merged and became MCI WorldCom, "one of the largest telecommunication companies in the world" and second largest in America (Funding Universe, 1999). At its peak, MCI WorldCom was predicted by many analysts to become "the fastest growing megacorp" with more than 80,000 employees in over 65 countries around the world (Sridhar, 2002). MCI WorldCom was worth $180 billion at its top during the dot com era of the late 1990s but as soon the dot com bubble burst it began to see its market value fall and an accounting scandal was in the works (WorldCon?, 2002). What began in 1999 and continued through May of 2002 was one of the largest accounting scandals in American history as well as led to the biggest Chapter 11 bankruptcy protection in United States history (Jonesington, 2007). MCI WorldCom, however did not become the megacorp it was predicted to became an instead became a mega accounting scandal.
MCI WorldCom's scandal became apparent to the public in early 2002 with what many believed was an order booking scandal in three branch offices, Pentagon City, Baltimore, and Chicago offices (Dreazen, 2002). Three of MCI WorldCom's top selling employees, Peter Collier, Messrs, and Roger Davis, had been boosting their sells and that of their sales team by artificially inflating their numbers using sales already accounted for in other division, by as much as "$4 million in illegitimate sales commissions" (Dreazen, 2002). Collier, Messrs, and Davis were all fired but the damage to WorldCom had just begun. With the booking scandal that had recently taken place at MCI WorldCom many eyes became focused on the company. The next big hit to the company was the firing of CEO Bernard Ebbers in April 2002 (Jonesington, 2007). Just a year earlier, Mr. Ebbers had gotten the Board of Director for MCI WorldCom to loan him $400 million to cover margin calls for his stock which he often "used to finance his other businesses endeavors", however this did not bring prices back up and he was fired (Jonesington, 2007).
The final straw for MCI WorldCom became evident in the summer of 2002, when an internal auditor for MCI WorldCom, Cynthia Cooper discovered that around $3.8 billion in operating costs were being stated as capital expenditures so they could be accounted for in another period (Solomon, Sandberg, Pulliam, 2002). The SEC was notified of the mishandling on of line costs which are expenses of interconnection between telecommunication companies and both parties took action (Jonesington, 2007). The SEC filed courts orders preventing MCI WorldCom from destroying documents and asked for a full reporting of what had occurred; while MCI WorldCom fired its CFO Scott Sullivan and allowed Senior Vice President David Myers to resign (Schnaue, Sieroty, 2002). MCI WorldCom also hired an outside auditing firm, KPMG LLP to audit their book which had previously been audited by Anderson LLC, an account firm currently in trouble over its auditing practices for Enron's accounting scandal (Schnaue, Sieroty, 2002). After the scandal became public, MCI WorldCom's stock plummeted to .83 cent in June 2002 at which time Nasdaq Stock Market halted trading (Schnaue, Sieroty, 2002). During MCI WorldCom's investigation for answers as too why operating cost had been used as capital expenditures it made another discovery; "that the company inflated revenues with bogus accounting entries from corporate unallocated revenue accounts" (Jonesington, 2007). The two years that were found to have the biggest changes in income were 2001 with $3.06 billion and the first quarter of 2002 with $797 million (Schnaue, Sieroty, 2002). If the numbers had not been inflated, the earnings for 2001 would have been $6.34 billion "before interest, taxes, depreciation and amortization" and "$1.37 billion for the first quarter of 2002" making a loss for both periods (Schnaue, Sieroty, 2002). All in all it is believe that almost $11 billion in assets were inflated by the accounting practices of MCI WorldCom (Jonesington, 2007).
Many of MCI WorldCom's executives were charged for their part in the