WorldCom began in 1984 as a small long distance provider called Long Distance Discount Services, and grew rapidly through acquisitions in the 1990s, changing its name to WorldCom and becoming the second largest long distance provider after merging with MCI in 1997. However, as the telecom boom ended in 2000, WorldCom's revenues fell short of expectations while debt from mergers remained high. In 2002, WorldCom admitted to fraudulently inflating earnings through improper accounting, including reducing reserve accounts by $2.8 billion and improperly capitalizing regular operating expenses. This caused its stock price to plummet from $64.50 to under $1, and it filed for the largest bankruptcy in U.S. history at that time

1. Srishti Sachan
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2. RISE OF WORLDCOM
 Established in 1984 as a small long distance service
provider, under the name of Long Distance Discount
Services (LDDS).
 Bernard Ebbers appointed CEO in 1985.
 1988-94 – Acquires over half a dozen communication
companies; ranks 42nd in Fortune 500 companies’ list.
 1994-95 – LDDS acquires IDB WorldCom and changes
name to WorldCom Inc.
 10th November 1997- WorldCom merges with
Microwave Communication Inc (MCI) for $37 billion.
Stock price peaks at $64.50.

3. FALL OF WORLDCOM
 2000 – Telecom boom ends, demand goes down leading to
hyper- competition and vicious price wars.
 Revenues fall short of expectations while debt taken to
finance mergers and infrastructure remains.
 2002 – CEO Ebbers resigns, company lays off 17000
workers. Stock price plummets below $1, closing at 91
cents.
 June 2002 – WorldCom admits fraud and files largest
bankruptcy in US history. Stock fall to 20 cents.

4. WorldCom
manipulated accounts
in mainly two ways:
First, by reducing
reserve accounts.
Second, by capitalizing
operating expenses.
WorldCom to World‘Con’

5.  The company inflated its revenues with bogus accounting entries
from ‘corporate unallocated revenue accounts’.
 WorldCom reduced the reserve accounts held to cover the liabilities
of acquired companies thereby adding $2.8 billion to the revenue line
from these reserves. As a result, the profit margin increased
considerably between 1998-2000.
 When reserves didn’t cut it, WorldCom started recording its line-costs
as capital expenditure.
 Line- costs are the fees that a telecom company pays to outside
service providers for carrying its customers’ calls on their lines.

7.  Under GAAP (Generally Accepted Accounting Principles), these fees
cannot be capitalized. However, WorldCom did not calculate these line
costs as operating expenses and therefore did not subtract them from
income.