WorldCom Summary

7/29/2019 WorldCom Summary

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CorporateGovernance

WorldCom

Submitted to:

Prof. Dr. Muhammad Usman

Submitted by:Sehrish Arshad 1001Ayesha mehmood 1014Sadia Aslam 1022

Fahad saleem 1119


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Corporate Governance

M.com 4th semester Page 1

WorldCom was founded in1983 by Bernard Ebbers,David Singleton and Murry Waldren. A long distance

company on napkin in a coffee shop in Hattiesburg, initially called LDDS. Ebbers elected as president

and CEO of company. In 1989, LDDS became a public company, started with about $650,000 in Capital.

In 80s and early 90s it followed a series of more than 60 mergers and acquisitions. The strategy behind

this was to deliver economies of scale and make it big blooming telecom market. On 25 th May 1995,

company officially changed its name to WorldCom. In 1996, WorldCom purchased MFS communicationInc. MFEs internet subsidiary, UUNET gave it substantial international presence. By 2002, it became the

No.2 residential long-distance carrier in US. Ebbers became famous for the way he had engineered the

success of WorldCom. He was rated richest person of America by Forbes.

In 1999, WorldCom attempted to acquire another telecom company, however Department of justice

objected this move smelling something fishy in the deal. WorldCom officials realize that merger were not

a sustainable growth strategy.by 2002, WorldCom growth started melting down. In 1999, its stock was

trading at double digit figure, but by January it had become worthless. CFO Scott was fired by board,

trading of shares was stopped and department of justice asked for investigation and rework its financial

statements for 2001 and 2002.With falling value of WorldComs shares, huge debts and pressure from

investing public, Ebbers resigned in April 2002. John Sidgmore took over as CEO and appointed KPMG

as company new auditor.

WorldCom had made unrealistic financial targets and fail to meet them. Sullivan used accounting

treatments that had no base in GAAP. A careful analysis by KPMG revealed that the company was

capitalizing its line costs, major operating expenditure for long distance carriers. KPMG auditor

discovered that this line cost thereby spreading over many years. This accounting treatment affected the

pre-tax income figures and earnings. When statements were reworked it was noted that in some cases

where WorldCom reported profit for quarters, the company actually had incurred a loss. In July 2002,

KPMG also announced another irregularity. The reserve accounts, was manipulated by company to

increase the net income figure. WorldCom set up reserves for line costs payments, but bills were

generally not paid for several months after the cost were incurred. WorldCom executive submitted

dubious financial statements to the SEC. WorldCom created two versions of accounts-the actual version,

reflected the actual operating expenses and final version that was rigged to meet market expectations.

WorldCom has variety of people cultures accounting practices and business strategies. Company has

acquired as many as 60 business entities each of which has own set of culture. Various department of the

corporate office such as finance legal network operations and human resources were located in different

cities hundreds of miles away from one another. It was reported that many employee were unaware of the

existence of an internal audit department. Company had a hodgepodge culture with no well-defined rules

of behavior for anyone. Culture of the company was also very hierarchical. Company encouraged the

attitude that employees should do what they are told and not to ask any question entries were not

supported with proper documentation prepare the reports that were false. Department of company was

dispersed and difficult to interact with one another. Ebbers restored to a series of mergers and acquisitions

taking over 60 companies in all to build his empire. Nearly all of the transactions were financed by highly

valued WorldCom stock to finance by booming stock market of the mid and late 1990s.industry growth

slowdown and the economy entered a recession the company stock prices fell from as high as $64 to

$2.value of stock was almost worthless. Ebbers took personal loan of $400 million in 2002 to pay off part

of his debt.


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Bernard Ebbers the CEO of WorldCom neither the qualified not experience enough to lead a

telecommunication giant of such size and stature. He was the former basketball coach. Ebber was more

interested in his own fortunes rather than creating long term shareholding values. He did not provide the

necessary leadership to see the company through hard days in a legitimate manner. He might not know

the exact nature of accounting treatment. During the mid-1990s WorldCom business was booming with

the telecom industry and the economy in general growing rapidly. In late 1990s economic scenario ofcountry took drastic change. The telecom industry slowed consumer prices was intensified and a rise in

the demand for mobiles phones affected the income statement of almost all telecom companies

WorldCom was no exception to this. The US Telecommunication Act OF 1996 was intended to improve

competition in the telecom industry. Several companies sprang up to meet surge in the demand for

telecom services furthered by an overly optimistic projection of internet growth. Most of the companies

borrowed heavily to expand their capacities. The demand for the revenue growth was so intensive. The

aim was to report the high earnings ratio and income compared to the estimate. Top management in the

company resort irregularities to boost if not maintains the E/R ratio.

Richard Breeden the man whom SEC nominated as the Corporate Monitor to ensure the restructuring of

WorldCom after it filed for bankruptcy indicated the WorldCom collapse could have been avoided had

the board of directors been more alert and was aware of the malpractices taking place within the

company. The board has been criticized for being unable to control the CEO. The directors were indulged

in lavish spending and were richly compensated and were evidently by their huge salary and service

brokerage. The audit committee spent as little as three to 6 hours per year in carrying out its functions.

Loans were used to purchase various unrelated and usually overvalued business which Ebbers used for his

own entertainment the compensation committee also approved a huge severance package for Ebbers and

his wife amounting $50 million.

Decline in the value of stock; the collapse of WorldCom affected its stakeholders to a great extent. The

company also wrote off about $82 million of its assets. The shares value declined by 95 per cent leaving

investors penniless. Millionaires became paupers overnight. Workforce cut down drastically; The

Company cut down its work force by 17000 and about 3500 had to leave within a week of the company

filing for bankruptcy and workforce of about 40000 employees. Customers; WorldCom bankruptcy

jeopardized service to its 20 million retail customer a part from the many government contract, affecting

80 million social security beneficiaries. Customers were not able to switch to other service providers as a

full scale switch could take months. UUNET handles more than 40 per cent of the US interest traffic

including a majority of email sent within the United States and the rest of the world. Financial institution;

Twenty five banks have sued WorldCom for defaulting on its loan payment amounting to $.6 billion. The

Indian connection; WorldCom owes VSNL approximately rs.400 crores. The two companies had signed

an agreement to carry each other long distance traffic to and from their respective countries. WorldCom

financial auditors that had served as its external auditors since 1989 denied any knowledge of theaccounting malpractices resorted to by WorldCom officials. The audit firm maintained that Sullivan had

withheld information from them during the audits. Andersen has been criticized for the inept handling of

WorldCom accounting policies, systems and books. Andersen should have taken into account the

shockingly large and increasing financial loss of WorldCom and paid more attention to the possibility of

aggressive accounting practices, especially when it was aware of such precedents in other corporation

whose accounts it audited.


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A review of the loans approved by the board of directors of WorldCom to CEO Ebbers, and the financial

health of the company was undertaken. In June 2002, the SEC filed fraud charges against the company.

The company had uncovered $11 billion in accounting fraud and had reported earnings and understated

expenses to the tune of $74.5 billion. The jury, however, refused to buy the argument that a manipulation

of such a large extent could go unnoticed by the CEO of the company. The jury convicted Bernard Ebbers

of conspiracy securities fraud and filling of false documents with the SEC, and sentenced him to a prisonterm of 25 years.

Documents

WorldCom Summary