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World Com – The Fraud
World Com – The Fraud
World Com – The Fraud
World Com – The Fraud
World Com – The Fraud
World Com – The Fraud
World Com – The Fraud
World Com – The Fraud
World Com – The Fraud
World Com – The Fraud
World Com – The Fraud
World Com – The Fraud
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World Com – The Fraud

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  • 1. WorldCom – The fraud Navin Bafna GMBA08A125 Investment Banking
  • 2. The Background – WorldCom <ul><li>Company previously known as LDDS </li></ul><ul><li>LDDS – Long Distance Discount Services </li></ul><ul><li>Became WorldCom in 1995 </li></ul><ul><li>Business – Telecommunications </li></ul><ul><li>CEO – Bernard Ebbers </li></ul><ul><li>Entered the Telecom business by acquiring MFS communication </li></ul><ul><li>Filed for Bankruptcy on july21, 2002 </li></ul><ul><li>Revenues – 30 bn US $, Assets – 104 bn US $ </li></ul>
  • 3. Business style - Ebbers <ul><li>Known as the “whiz kid” of wall street </li></ul><ul><li>LDDS became the fourth largest operator in US </li></ul><ul><li>Mergers & Acquisitions Specialist </li></ul><ul><li>More than 60 acquisitions </li></ul><ul><li>All acquisitions done on the power of the rising stock prices of WorldCom in Bourses </li></ul><ul><li>Focus on the prices of the stock </li></ul>
  • 4. The Problem – Recession 2000 <ul><li>Expense to Revenue ratio – 42 % </li></ul><ul><li>Margins started decreasing due to industry recession. </li></ul><ul><li>Estimation of Long term costs monthly </li></ul><ul><li>Whereas the payment was done several months after the costs are incurred </li></ul><ul><li>Creation of Accrual liability - outstanding expenses. </li></ul>
  • 5. Accounting Analysis <ul><li>Line costs are to be treated as revenue expenses </li></ul><ul><li>Future expenses are accounted as Accrual </li></ul><ul><li>When the actual payment is made the amount is reduced by them and then a matching effect from Cash & Bank. </li></ul><ul><li>If deficit or surplus in Accruals the same is transferred to income & expense account </li></ul><ul><li>Thus creation of a provision for Future Expenses </li></ul>
  • 6. Expense Capitalization <ul><li>Costs of extra network capacity. </li></ul><ul><li>As the future liabilities of revenue nature directly reduces the profit or ‘Bottom line’ </li></ul><ul><li>Ebbers to maintain the expense revenue ratio reduces the revenue expenses and capitalize them </li></ul><ul><li>Treating them as an asset which can be used in future </li></ul>
  • 7. Fraud <ul><li>The Accruals created for payments are released thus profits are inflated </li></ul><ul><li>Doctrine of Conservatism – Account for all future expenses and payments. </li></ul><ul><li>Line costs which are expenses of revenue nature </li></ul><ul><li>World com Capitalized these expenses </li></ul><ul><li>Created Assets out of expenses. </li></ul><ul><li>Inflated the Asset side. </li></ul>
  • 8. Example
  • 9.                                     270000   270000     150000   150000                     90000 Cash - hand               50000 Shares 20000 MR X Debtor           40000 Expenses 50000 Shares   25000 Dividend Recd 34500 Profit 50000 Plant 25000 Dividend       12000 Depreciation 30000 Goods 75000 Loan   25000 Profit on sale-shares 53500 Expenses 10000 Furniture 100000 Capital   100000 Sales 50000 Purchases                   Amount Payments Amount Receipts   Amount Income Amount Expenses Cash Flow   Income and Expenses A/c                                               243000   243000                               80000 Debtor X's 13500 Accruals           90000 CASH 20000 CREDITORS           25000 Shares 34500 PROFITS           40000 PLANT & MCH 75000 LOANS           8000 FURNITURES 100000 CAPITAL                     1   BALANCE SHEET
  • 10.                                     270000   270000     150000   150000                     90000 Cash-hand               50000 Shares 20000 Mr. DEBTOR           40000 Expenses 50000 Shares   25000 Dividend Recd 48000 Profit 50000 Plant 25000 Dividend     Profit on sale MCH 12000 Depreciation 30000 Goods 75000 Loan   25000 Profit on sale-shares 40000 Expenses 10000 Furniture 100000 Capital   100000 Sales 50000 Purchases                   Amount Payments Amount Receipts   Amount Income Amount Expenses Cash Flow   Income and Expenses A/c                                               243000   243000                               80000 Debtor X's               90000 CASH 20000 CREDITORS           25000 Shares 48000 PROFITS           40000 PLANT & MCH 75000 LOANS           8000 FURNITURES 100000 CAPITAL                     2   BALANCE SHEET
  • 11.                                     270000   270000     150000   150000                     90000 Cash - hand               50000 Shares 20000 Mr.X DEBTOR           40000 Expenses 50000 Shares   25000 Dividend Recd 88000 Profit 50000 Plant 25000 Dividend     Profit on sale MCH 12000 Depreciation 30000 Goods 75000 Loan   25000 Profit on sale-shares   =0.00 Expenses 10000 Furniture 100000 Capital   100000 Sales 50000 Purchases                   Amount Payments Amount Receipts   Amount Income Amount Expenses Cash Flow   Income and Expenses A/c                                               283000   283000                               40000 EXP CAPITALIZATION               80000 Debtor X's               90000 CASH 20000 CREDITORS           25000 Shares 88000 PROFITS           40000 PLANT & MCH 75000 LOANS           8000 FURNITURES 100000 CAPITAL                     3   BALANCE SHEET
  • 12. <ul><li>Thank You !!! </li></ul>

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