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Worldcom
- 2. Name : LongDistance Discount Services(LDDS) Worldcom (1995) Founder : Murray Waldron and William Rector CEO : Bernie Ebbers (1985) Founded : 1983 Type : Telecommunications Expertise : Data , telephone services etc Company’s Profile
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- 4. 75 mergersand acquisitions of smaller companies. Bought competitor MCI. Attempted to buy sprint in 2000. Anti-trust regulation wouldn’t allow sprint acquisition. Stock prices shot upto $96.75 per share. WorldCom’s Ascension
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- 6. DOT-COM Boom Bust Thedot-com bubble (1997–2000). •Marked by the founding of a group of new Internet based companies commonly referred to as dot-coms. •Prefix Investing : Adding a .COM or E-prefix , resulted in stock prices to shoot up
- 7. •COMPETITION •MERGERS AND ACQUISITIONS •HUGELINE COSTS •FAILED MERGER WITH SPRINT •HIGH EXPECTATIONS
- 8. •Recession after thedot-com boom ended. •Revenues fall short of expectations, while Debt remains. •With failure of sprint merger it faced a severe setback •Market value of the company’s stock plunged from $150 billion - $150 million. Reasons for Fraud
- 9. WorldCom customer in ChicagoWorldCom customer in London Local network in Chicago WorldCom’s network British network Line Costs
- 10. Fraud WorldCom's accounting department underreported 'linecosts’ The company inflated revenue by $ 1 billion.
- 11. What “ACTUALLY” Happened Classified operating expensesas long- term capital investments ( $3.85 billion). Reduced the amount of money held in reserve by $2.8 billion and moved it into the revenue line. Added a journal entry for $500 million in computer expenses without the supporting documents. Ebber took $43 million loan to finance the purchase of a 500,000- acre ranch- backed by WorldCom stock. They turned WorldCom's losses into profits of about $1.38 billion in 2001.
- 12. •Scott Sullivan misallocatedcapital expenditure as normal expenses, thus turning profits into losses ( $9 billion). • Found an unaccounted entry of 500 million dollars. • Cooked books , found various inauthentic entries. • 3.8 billion dollars in misallocated expenses. Detection MAJOR CONTRIBUTORS - CYNTHIA COOPER and GENE MORSE
- 13. Whistle Blowers Cynthia CooperGene Morse WorldCom’s Director of Internal Audit Morse began his career at WorldCom in 1997 Her team discovered $3billion in questionable expenses Worked with Cynthia Cooper throughout the investigation Met with four executives to track down and explain the undocumented expenses Reported the findings to the audit committee Remained as VP of Internal Audit WorldCom’s board of directors on June 20,2002
- 14. Disclosure • The SECwas suspicious as WorldCom was making so much profit, AT&T was losing money. • WorldCom's audit committee was asked for documents • When irregularities were spotted in MCI's books, the SEC requested that WorldCom provide more information • Admitted to inflate its profits by $3.8 billion and not following GAAP Standards.
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- 16. On Stock Prices BULLISH(1998-1999) $96.75(alltime high) BEARISH(2000-2002) Below $1 Aftermath of Scandal $0.20 Delisted from NASDAQ
- 17. $180 Billionof shareholder value lost as prices dropped drastically Public Pension funds faced losses of more than $1billion Owed a total debt of $41 billion dollars Top creditors – J.P. Morgan Chase, Citibank , Goldman Sachs etc On Investors and Lenders
- 18. 57,000 employeeslost their jobs Employee benefits withheld when filed for bankruptcy On Employees
- 19. CEO CFO Bernard Ebbers Scott Sullivan DavidMyers (Vice President) Buford Yates Troy Normand Betty Vinson (Audit Department) People Involved
- 20. Bank Amount Citigroup $2.58Billion J.P. Morgan Chase $2.0 Billion Bank of America $460.5 Million Deutsche Bank $325.0 Million ABN Amro $278.4 Million Other lenders $370.9 million Total $ 6.0 Billion SETTLEMENT
- 21. NAME POST SENTENCE BernardEbbers CEO 25 Years in prison Scott Sullivan CFO 5 years in prison David Myers Vice President 1 Year and 1 Day Buford Yates Former Director of Accounting 1 Year and 1 Day Troy Normand Former Accountant 3 Years Betty Vinson Former Director of Corporate Accounting 5 months Legal Trials
- 22. One ofthe biggest accounting firms of U.S. Involved in top 2 scandals of U.S Took $47.1 million dollars as bribe to keep this a Secret. Reduce its workers from 85000 to 200. Auditing license cancelled. ARTHUR ANDERSON LLP Kenneth Avery Melvin Dick
- 23. Bankruptcy • When abusiness is unable to service its debt or pay its creditors, the business or its creditors can file with a federal bankruptcy court for protection. • Unable to pay its debts, WorldCom filed for Bankruptcy on July 19,2002. • It was the largest declared bankruptcy in the history of US till 2002.
- 24. Aftermath • Previous bondholdersended up being paid 35.7 cents on the dollar. • WorldCom entered into an agreement with the SEC to settle the civil fraud suit. • Paid settlement to its lenders via company & then personal assets. • February 14, 2005, Verizon Communications agreed to acquire MCI for $7.6 billion
- 25. Sarbanes Oxley Act2002 • An Act to protect investors by improving the accuracy and reliability of corporate disclosures • Named after senator Paul Sarbanes & G.Oxley • Was enacted as a result of accounting frauds committed by WorldCom , Enron & Tyco.
- 26. Present Scenario •On February14, 2005, Verizon Communications acquired MCI for $7.6 billion. •December 2005, the Microsoft announced that MCI will join it by providing Voice Over Internet Protocol(VoIP) service. • MCI's last new product- MCI Web Calling. After the merger, this product was renamed "Verizon Web Calling". •Stock Price(Verizon) - $46.
- 27. Ensuring Auditis done independently and regularly. There should be Non-Executive board members for controlling. Ensuring internal audits and rest accounting practices are held in a unbiased manner. Creating Ethical policies throughout the company. Passing laws like Sarbanes Oxley Act , so that such Scams and Scandals do not happen again. Our Recommendations
- 29. 1. Aayush Maheshwari 2.Rohan Agrawal