Top Banner
THE RISE AND FALL OF WORLDCOM INC.
24

corporate scam rise and fall of world com

Nov 24, 2014

Download

Documents

billatony

world comm. the telecommunication company scam
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: corporate scam rise and fall of world com

THE RISE AND FALL OF WORLDCOM INC.

Page 2: corporate scam rise and fall of world com

HISTORY

• WorldCom was established in Hattiesburg, Mississippi,U.S.A in 1983

• Murray Waldron and William Rector, both from USA, were the founder of the company.

• First it was named as Long Distance Discount Services (LDDS).

Page 3: corporate scam rise and fall of world com

• In 1985 LDDS selected Bernard Ebbers to be its CEO.

• The company went public in 1989 through a merger with Advantage Companies Inc.

• The company name was changed to LDDS WorldCom in 1995, and later just WorldCom.

CONTD.

Page 4: corporate scam rise and fall of world com

4

OVERVIEW OF WORLDCOM

Key Events 1996: Acquired MFS (including internet backbone) 1998: Acquired MCI (more than twice it’s size) 2000: Failed merger with Sprint (would have been the largest merger in history)

2000: Dotcom Bubble Burst (rapid decline in telecom stock values)

2000-02: WorldCom loans $400M to CEO (Ebbers) 2002: Accounting Fraud uncovered 2002: Filed for Bankruptcy Protection 2004: Emerged from Bankruptcy as MCI 2005: Verizon agrees to acquire the company for $6.75B (plus assumption of $6B of Debt)

Page 5: corporate scam rise and fall of world com

5

OVERVIEW OF WORLDCOM

Financial Highlights 1994 1999 2001 2004

($ in billions)

Revenues $2.2 $37.1 $35.2 $20.7

Total Assets $3.4 $91.1 $103.9 $17.1

Employees (in 000's) 7.5 97.6 87.8 40.4

Market Cap. $3.3 $150.5 $42.8 $ 6.4

Debt $0.8 $ 13.1 $30.0 $ 5.9

Total Capitalization $4.1 $163.6 $72.8 $12.3

Source: Original SEC Filings , before restatements for accounting fraud.

Page 6: corporate scam rise and fall of world com

MERGER & ACQUISITION

1992

• Advanced Communication Corp.

1993

• Metromedia Communication Corp.• Resurgens Communication Group.

1994

• IDB Communication Group.

1995

• William Technology Group Inc.

1996

• MFS Communication Company.• UUNet Technologies Inc.

Page 7: corporate scam rise and fall of world com

1998

• Purchased online pioneer CompuServe from its parent company H&R Block.

2001

• It acquired Intermedia Communication, it was its largest acquisition.

1997

• WorldCom and MCI Communication announced their US $37 billion merger.

• It was largest merger in U.S history.• From 1998 new company MCI WorldCom opened

for business.

CONTD.

Page 8: corporate scam rise and fall of world com

FAILED MERGER

• On October 5, 1999 Sprint Corporation and MCI WorldCom announced a $129 billion merger agreement.

• It would had been the largest merger in U.S history.

•MCI WorldCom could had been ahead of AT&T as the largest communication company.

•In 2000, deal was cancelled because of pressure of U.S. Department of Justice and European Union on concern of creating monopoly.

Page 9: corporate scam rise and fall of world com

DISCOVERY OF FRAUD AND CHRONOLOGY OF EVENTS

1. Obscure tips were sent into the Internal audit team

2. MCI audit and review of books uncovered

accounting irregularities

3. In March 2002, John Stupka complained to Internal audit about $400 million he set aside that Sullivan wanted to use to boost WorldCom’s income.4. March 7, 2002 - the SEC requests information from WorldCom.How could WorldCom make so much when AT&T is losing money?

Page 10: corporate scam rise and fall of world com

6. June 14, 2002 - The Internal audit team contacted WorldCom’s audit committee

7. Internal auditor, Cindy Cooper, asked for documents supporting numerous capital expenditures.

– No supporting documents were found

8. The controller admits to internal auditors that the accounting treatment is wrong

– States no accounting standards support this accounting

© 2

003, 2005 b

y th

e

AICPA

Page 11: corporate scam rise and fall of world com

BANKRUPTCY INFORMATION

•WorldCom Inc valued at $180 billion.

•Stock price fell from $64 to $2.65.

•Ebbers sold out his personal shares in order to repay the loans.

•In June 2002,within a day the stock price fell to $0.09.

•On July 21,2002,Worldcom filed for bankruptcy.

•Investigators uncovered an additional amount of $3.831 billion in inappropriate accounting practices.

Page 12: corporate scam rise and fall of world com

• More than $7.683 billion over past 3-4 years.

•Anderson:couldnot be relied on in the view of accounting manipulations.

•Earnings management can have fraud.

•Auditors need to identify the presence of intention.

Page 13: corporate scam rise and fall of world com

THE FRAUD1997 1998 1999 2000 2001

Revenue 7384 17678 35908 39090 35179

Operating Income

1018 (975) 7888 8153 3514

Total Assets 23596 86401 91072 98903 103914

Operating Margin(%)

13.78 (5.51) 21.96 20.85 9.98

During 2001, WorldCom Inc. split into two tracking stocks: MCI WorldCom Inc, the long- distance consumer carrier and WorldCom Inc, which sells voice and data services to corporations.

Page 14: corporate scam rise and fall of world com

1999 2000 2001

Revenue 35,908 39,090 35,179

Net income 2,294 2,608 1,407

Net income-RESTATED 2,085 (649) (1,975)

Total assets 91,072 98,903 103,914

Long-term Debt 17,209 17,696 30,038

Shareholders’ funds 51,238 55,409 57,930

Intangible assets to totalAssets

48% 47% 52%

Consolidated Financial Statements

Page 15: corporate scam rise and fall of world com

Company’s “game”-“line costs” as capital expenditure”

Line costs which accounted for 40-45% from the revenue Line costs paid during 2001 were $14.739 billion.

During the same year, the report profit was $1.407 billion while the line costs capitalized alone were $3.055 billion. Therefore, the company had a loss of $1648 millions but by using the account fraud they kept the top showing a profit of $1407 million.

Thus managed to avoid a loss of 7.6 billion dollar

17000 employees laid off, ie 20% of work force.

Page 16: corporate scam rise and fall of world com

IMPACT OF THE FRAUD

Executives and Accounting Staff6 individuals convicted of fraud /

conspiracy / false filingsEbbers – CEO 25 years in prison

Sullivan – CFO 5 years in prison

Myers – Controller 1 year in prison

Yates – Dir. of Acctg. 1 year in prison

Vinson – Acctg Dept. 5 months in prison

Manager Normand –Acctg Dept. 3 years probation

ManagerAbove 6 individuals agreed to pay a

total of $24-34M to settle securities class action case

16

Page 17: corporate scam rise and fall of world com

IMPACT OF THE FRAUD

Board of Directors12 Directors agreed to pay (out of pocket) a total of $25M to settle securities class action case

Investment BankersSettlement of securities class action case with banks:Citi Group $2.6BJP Morgan 2.0BB of A .5BOther .9B

17

Page 18: corporate scam rise and fall of world com

IMPACT OF THE FRAUD

Shareholders$180B of shareholder value lost (based on peak stock price)

Debt & Preferred Stock holders$37.5B of debt and preferred stock holder value lost

Company$750M settlement paid to SECEmployees57,000 employees lost jobsAll current and former employees lost most of their retirement savings (invested in WorldCom stock)

Page 19: corporate scam rise and fall of world com

Independent AuditorArthur Andersen agreed to pay $65M to settle securities class action case

Insurance CompaniesAgreed to pay $36M to settle claims against WorldCom directors and officers

19

Page 20: corporate scam rise and fall of world com

LESSON FROM CORPORATE SCAM

Control a dominant CEO. Keep the Board of Directors fully informed Beware of close personal ties between

management and

the board. Control your law department completely Promote a culture of compliance

Page 21: corporate scam rise and fall of world com

CREDITS

• ANAND JOHN

• AMBIKA NAIR

• AMRESH KUMAR

• KIRAN EAPEN MATHEW

• ROHAN KURIAN JOHN

Page 22: corporate scam rise and fall of world com

Ethics must and should be taught. People are not born with the desire to be ethical or be concerned with the welfare of others. And contrary to all beliefs, one person can make a difference.

CONCLUSION

Page 23: corporate scam rise and fall of world com
Page 24: corporate scam rise and fall of world com

http://money.cnn.com/2002/07/19/news/worldcom_bankruptcy/

V.R.K. Chary, (2004), Ethics in Accounting. Global Cases and Experiences, WorldCom Inc., The ICFAI University Press, India, pg. 41-57.  

http://www.scripophily.net/worldcominc.html

http://news.bbc.co.uk/2/hi/business/2066959.stm

REFERENCES