WorldCom was an American telecommunications business, which is renowned for its collapse in the early 2000’s – mainly due to an accounting scandal which remains steeped in infamy. Prior to its collapse, WorldCom was one of the biggest communications companies in the United States. In this article, we take a look at their history, the notorious accounting scandal, and what eventually came of the business.
WorldCom actually started in 1983, being founded as ‘Long Distance Discount Service Inc.’ (LDDS). After a strong start, the company gained a strong foothold in the competitive telecommunications market. In 1989, LDDS merged with Advantage Companies Inc. Rapid growth would follow in the 1990s. The company made several acquisitions in this time, in the process cementing their position as a telecommunications giant. 1995 saw the business renamed LDDS WorldCom.
In 1997, a deal that would have major ramifications for the telecommunications was sealed. WorldCom merged with MCI Communications in a $37bn deal – which was the largest corporate merger in history at the time. The business renamed once again – this time as MCI WorldCom. After further success, by 1999, MCI WorldCom and Sprint Corporation were set for a $129bn merger. But the merger never came to fruition, with regulators rejecting the deal due to fears of a monopoly developing. Later in 1999, the business became simply known as WorldCom.
WorldCom’s downfall though would take place in the early 21st Century. WorldCom had expected to seal their merger with Sprint Corporation, but were unable to do so. Meanwhile, the telecommunications industry had somewhat matured, meaning continuous growth was difficult. In 2000, WorldCom’s stock price started falling. Banks too demanded WorldCom’s CEO Bernard Ebbers covered margin calls on his personal stock. Ebbers subsequently persuaded the board to provide a $400million loan to cover said margin calls. The intention of this had been for WorldCom to protect their stock price.
Yet this strategy failed in the long term, and Ebbers resigned in 2002. On the surface, it appeared WorldCom were merely going through a minor blip, but the period between 1999 and 2002 had actually witnessed a terrible scandal – taking place in the background, away from public view. Following their struggles with merging with Sprint, WorldCom’s executives engaged in a process of fraudulent accounting. While the fraud was committed sparingly in 1999, by the early 2000s, the business was engaging rampantly in fraud. This was being directed by Ebbers, CFO Scott Sullivan, Accountancy Controller David Myers and Director of General Accounting Buddy Yates.
The fraud was accomplished using two methods. First of all, some expenses were listed as capital expenditures – as opposed to expenses on the balance sheet. Essentially, supplies like office stationery was listed as a capital expenditure. But this was done on a wider scale, helping to inflate WorldCom’s assets. Secondly, bogus accounting entries from ‘corporate unallocated revenue accounts’ meant that WorldCom’s revenues too were overstated. It is believed disgraced accounting giant Arthur Andersen were complicit in the fraud – though they were engulfed in the Enron Scandal at the time, meaning the nature of their connection was never determined.
In mid-2002, a small group of internal auditors at WorldCom spotted a range of issues and inconsistencies within the accounts – essentially discovering the fraud. The small group worked together, often secretively during the night. They realised $3.8bn worth of fraud had been committed. After their discovery, WorldCom’s Board of Directors were notified. Sullivan was dismissed, while Myers resigned. Ebbers had already left at this point. The US Securities and Exchange Commission (SEC) launched an investigation into WorldCom’s affairs.
The world was still in a state of shock after the Enron Corporation’s accounting scandal, which had affected a huge range of organisations and people. More misery would follow for the economic world as WorldCom’s accounting scandal reached major news outlets, leading to their share price plummeting. By July 2002, WorldCom had filed for Chapter 11 Bankruptcy Protection – succeeding Enron as the biggest bankruptcy in history (since surpassed by Lehman Brothers).
The SEC’s investigation found that accounting fraud had indeed been taking place on a wide-scale basis. Bankruptcy proceedings followed, with a company reorganisation agreement reached. The company would need to pay the SEC $750million. Some of this would be contributed towards stock to wronged investors. After the reorganisation was complete, further Civil proceedings took place. WorldCom eventually had to pay a hefty fine of $2.25bn.
The business was eventually relaunched in April 2003, becoming known simply as MCI – with the WorldCom name dropped. The business changed its corporate headquarters in the process. In 2004, the company emerged from Chapter 11 Bankruptcy. The following years would see the business return to some stability. In 2005, Verizon Communications acquired MCI for $7.6bn – resulting in the end of what was once WorldCom. Since then, the business has been part of Verizon’s broad range of telecommunication activities.
So, an accounting scandal proved to be the downfall of WorldCom. They weren’t the first company to collapse due to an accounting scandal, and they surely won’t be the last. However, few scandals have ever hit the height of WorldCom. Estimates suggest WorldCom’s assets alone had been inflated by over $10bn. Ex-CEO Ebbers was convicted of fraud and conspiracy, being sentenced to 25 years in jail. Sullivan was sentenced to five years. Myers and Yates, along with others in the accounting department, escaped jail but were found guilty.
In conclusion, WorldCom went from success to profound struggle. While other telecommunication businesses rode out the tough period of the early 2000’s, WorldCom attempted to cut corners, with their farcical accounting proving to be key. This was the largest scandal in American history up until the infamous Madoff Ponzi Scheme – with WorldCom forever remembered for its infamy. WorldCom may live on spiritually through Verizon, but it mainly reduced to a case study in this day and age.