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MCI was a major telecommunications company that merged with WorldCom in 1997 to form MCI WorldCom. WorldCom's fraud involved improperly capitalizing line costs that should have been recorded as expenses, making the company appear profitable when it was not. The fraud totaled $11 billion and was executed by CFO Scott Sullivan with the consent of CEO Bernie Ebbers to hide falling profits. This caused a $180 billion loss for investors. WorldCom filed for bankruptcy in 2002 and Ebbers received a 25-year prison sentence while Sullivan got five years. Former banks settled lawsuits with creditors for $6 billion.

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29 views2 pages

Govern

MCI was a major telecommunications company that merged with WorldCom in 1997 to form MCI WorldCom. WorldCom's fraud involved improperly capitalizing line costs that should have been recorded as expenses, making the company appear profitable when it was not. The fraud totaled $11 billion and was executed by CFO Scott Sullivan with the consent of CEO Bernie Ebbers to hide falling profits. This caused a $180 billion loss for investors. WorldCom filed for bankruptcy in 2002 and Ebbers received a 25-year prison sentence while Sullivan got five years. Former banks settled lawsuits with creditors for $6 billion.

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Background

MCI, Inc., with the trade name Verizon Business, is an American telecommunication corporation,
and is currently a subsidiary of Verizon Communications. In their time, It was recognized to be
second of the largest long distance telephone company, next to AT&T. It started as Long Distance
Discount Service during. It became a publicly traded company during 1989 after a merger with
Advantage Companies. On November 4, 1997, WorldCom and MCI Communications announced
another merger to form MCI WorldCom. The said merger is the largest corporate merger in U.S.
history. This merger formed the new company called MCI WorldCom.
Situation
The fraud committed by WorldCom involved capitalizing the line cost which is supposed to be an
expense of the company. It cannot be considered as an asset since it will only provide economic
benefit during the period hence, it is not allowed to be capitalized. They spread it over the span of
years which increased its asset while decreasing the expenses. Worldcom fraudulently took billions
of dollars in operating expenses and spread them out across so-called property accounts, which are
a type of capital expense account. This allowed Worldcom to show the expenses in smaller amounts
over a span of years, instead of reporting them immediately to investors.
Persons Involved
This scandal was made possible by the key personnel of the company. The CFO, Scott Sullivan,
consented by the CEO, Bernie Ebbers, was the one who executed the fraudulent strategy in order to
make the company look profitable in the eyes of the public. This was fueled by the technology
boom turning to a bust, and companies slashing expenditures on telecom services and equipment.
The scandal was alleged to be in the knowledge of a very controversial auditor,
Arthur Andersen, who was involved with the Enron case, which was also the company’s auditor at
that time.
Implications
The scandal resulted to a total of $11 Billion misstatements. To hide its falling profitability,
WorldCom inflated net income and cash flow by recording expenses as investments. By capitalizing
$3.852 expenses, the company was able to report profits of around $3 billion in 2001 and $797
million in Q1 2002, resulting to a profit of $1.4 billion instead of reporting a net loss. The whole
scandal, when put to rest, caused a shocking 180 billion loss for investors.
Actions Taken
WorldCom filed for bankruptcy on July 21, 2002. Only a month after that, its auditor, Arthur
Andersen, was convicted of obstruction of justice for shredding documents related to its audit of
Enron but there was no direct case regarding his involvement with the Worldcom scandal. Bernard
Ebbers, the CEO, was sentenced to 25 years in prison, and former CFO Scott Sullivan received a five-
year jail sentence after pleading guilty and testifying against Ebbers.
On the side of investors and creditors, Worldcom's former banks, including Citigroup, Bank of
America, and J.P. Morgan, settled lawsuits with creditors for $6 billion. Of that amount, around $5
billion went to the firm's bondholders, with the balance going to former shareholders.

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