The WorldCom scandal was a major accounting scandal that came to light in the summer of 2002 at WorldCom, the USA's second-largest long-distance telephone company at the time.

1. Manoj Sedai
MBA – FALL, 2020

2. Evolution of WorldCom
 Incorporated in 1983 as Long Distance Discount Services (LDDS), based in
Jackson Mississippi by Bernard John Ebbers and other three investors.
 Ebbers was named CEO of the company in 1985.
 Became a Public Company in 1989 as a result of merger with Advantage
Companies Inc.
 Changed the name to WorldCom Inc., in May 1995 With its eye on becoming a
global leader in telecommunications.
 The company grew rapidly in the 1990s, after completing several mergers and
acquisitions.
 From 1995 until 2000, WorldCom purchased over sixty other telecom firms. In
1997 it bought MCI for $37 billion. It was the largest corporate merger of US
history.

3. Rise and Fall of WorldCom

4. Motivation of the Fraud
 Increased competition due to the deregulation of the act of 1996 which permitted
long distance carriers to compete for local services.
 Personal financial circumstances of the CEO Bernard Ebbers.
 The Company’s Performance Bonus Plan, which began in 1997, required, that an
executive officer achieve a ten percent increase in revenue for his or her unit over
the same time period the previous year.
 Incompetent Board and Toxic Corporate Culture of ‘Not questioning the
superiors’ laid by the CEO Bernard Ebbers.

5. Violation of Accounting Principles
 The fraud was contemplated by senior members of the corporate finance
organization, including Chief Financial Officer Scott Sullivan, Controller David
Myers, and Director of General Accounting, Buddy Yates, under the direction of
CEO Bernard Ebbers.
 The fraud was accomplished primarily in two ways.
1. Reduction of reported line costs
 Releases of accruals
 Capitalization of operating line costs
2. Exaggeration of reported revenues

6. Income Statement of WorldCom

7. False Accounting Report

8. Corporate Governance Issues
Incompetent Board
 No checks or restraints placed on the actions of Ebbers and CFO Sullivan by the
BOD. In fact, Ebbers controlled the Board’s agenda, its discussions, and its
decisions.
 Lack of board of director’s attention to how the company was running.
 Approval of various loans and loan guarantee to Ebbers to prevent him from fire
selling of the stock, as a response to the margin call.
 Board of directors “habit of rubber stamping senior management decisions
without scrutinizing.
 Systemic attitude conveyed from the top down that employees should not
question their superiors, but simply do what they were told.
 Restricted access to Company’s computerized accounting system to handful of
people.

9. Toxic Corporate Culture and Synergetic
Corruption
 Corporate culture dominated by CEO Bernard Ebbers. Ebbers resisted
establishing a code of conduct and he never rewarded or demanded an
ethical business practices.
 Internal Audit reported directly to CFO Scott Sullivan.
 Unjustifiable Bonus and Remuneration Packages. Ebbers alone received
27 million as a bonus in Stock Option in 1996 alone.
 Inadequate Auditing by External Auditor, Arthur Anderson.
 Lack of corporate environment for Whistleblowing.

10. Aftermath of the Scandal
 In March 2002, SEC sent a WorldCom a” request for information”.
 By the beginning of the June, a small team of Internal auditors at WorldCom
discovered fraudulent entries in the book of WorldCom.
 On July 21, 2002, WorldCom and substantially all of its active U.S. subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code.
 On April 14, 2003, WorldCom changed its name to MCI, and relocated its corporate
headquarters from Clinton, Mississippi, to Ashburn, Virginia.
 WorldCom got a new Board of Directors and a new Chief Executive Officer; and a new
external auditor.
 Nearly 30000 people lost their jobs and investors from 110 countries lost 175 billion.

11. Trail and Verdict
 CEO Bernard Ebbers was convicted on nine counts of securities fraud
and sentenced to 25 years in prison in 2005.
 CFO Scott Sullivan received a five-year jail sentence after pleading guilty
and testifying against Ebbers.
 Controller David Myers, the third-ranking company executive and the director of
general accounting, Buford “Buddy” Yates, was sentenced to one year and one
day in prison.

12. Regulatory Reforms after the Scandal
 Enactment of Sarbanes-Oxley Act.
 Establishment of a new Public Company Accounting Oversight Board
 A requirement that the external auditors report directly to the company’s audit
committee
 Prohibition of Public accounting firm that audit the company from providing any
other services that could impair their ability to act independently in the course of
their audit.

13. Relevance of the Case today
To understand the importance of
 Establishing a culture of legal compliance and integrity in the organization.
 Accountability of audit committee and BOD in producing financial statements that fairly present
the financial condition and results of operations of the corporation.
 Independent accounting firm to audit the financial statements prepared by management and
issue an opinion that those statements are fairly stated.
 Corporate governance committee in playing a leadership role in shaping the corporate
governance of the corporation and the composition and leadership of the board.
 An active and independent Board of Directors and Committees.
 Effective checks and balances on the power of senior management.
 Formalized and well-documented policies and procedures, including a clear and effective channel
through which employees can raise concerns or report acts of misconduct.

14. THANK YOU !