The Rise and Fall of WorldCom

What Was WorldCom?

WorldCom was not just the greatest accounting scandal in the history of the United States — it was likewise one of the greatest bankruptcies ever. The disclosure that telecommunications monster WorldCom had cooked its books came closely following the Enron and Tyco frauds, which had shaken the financial markets. Nonetheless, the scale of the WorldCom fraud put even them in the shade.

Understanding WorldCom and Bernie Ebbers

WorldCom has turned into a maxim for accounting fraud and a warning to investors that when things appear to be too great to be true, they just may be. Its CEO, Bernie Ebbers — an amazing figure whose trademark was cowboy boots and huge cap — had incorporated the company into one of America's leading significant distance telephone companies by acquiring other telecom companies. At the pinnacle of the dotcom bubble, its market capitalization had developed to $175 billion.

At the point when the tech boom went to bust, and companies sliced spending on telecom services and equipment, WorldCom turned to accounting stunts to maintain the presence of always growing profitability. By then, at that point, numerous investors had become suspicious of Ebbers' story — particularly after the Enron scandal broke in the late spring of 2001.

Not long after Ebbers was forced to step down as CEO in April 2002, it was revealed that he had, in 2000, borrowed $408 million from Bank of America to cover margin calls, using his WorldCom shares as collateral. Subsequently, Ebbers lost his fortune. In 2005 he was sentenced for securities fraud and condemned to 25 years in jail.

Cooking the Books

This was not a sophisticated fraud. To conceal its falling profitability, WorldCom inflated net income and cash flow by recording expenses as investments. By capitalizing expenses, it misrepresented profits by $3.8 billion in 2001 and $797 million in Q1 2002, reporting a profit of $1.4 billion instead of a net loss.

WorldCom sought financial protection on July 21, 2002, just a month after its auditor, Arthur Andersen, was sentenced for deterrent of justice for shredding reports connected with its audit of Enron. Arthur Andersen — which had audited WorldCom's 2001 financial statements and inspected WorldCom's books for Q1 2002 — was found later to have disregarded reminders from WorldCom executives informing them that the company was inflating profits by inappropriately accounting for expenses.

This spate of corporate crime prompted the Sarbanes-Oxley Act in July 2002, which reinforced disclosure requirements and the punishments for fraudulent accounting. In the outcome, WorldCom left a stain on the reputation of accounting firms, investment banks, and credit rating agencies that had never fully been taken out.

To conceal its falling profitability, WorldCom inflated its net income and cash flow by recording expenses as investments, reporting a profit of $1.4 billion — instead of a net loss — in Q1 2002.

The Fallout

Bernard Ebbers was indicted on nine counts of securities fraud and condemned to 25 years in jail in 2005. Former CFO Scott Sullivan received a five-year prison sentence subsequent to pleading liable and testifying against Ebbers. On Dec. 18, 2019, Ebbers was conceded early release from jail for wellbeing reasons subsequent to serving 14 years of his sentence.

Because of debtor-in-possession financing from Citigroup, J.P. Morgan, and G.E. Capital, the company would make due as a going concern when it rose up out of bankruptcy in 2003 as MCI — a telecom company WorldCom had acquired in 1997. Notwithstanding, a huge number of workers lost their positions.

Without admitting liability, Worldcom's former banks, including Citigroup, Bank of America, and J.P. Morgan, would settle lawsuits with creditors for $6 billion. Of that amount, around $5 billion went to the company's bondholders, with the balance going to former shareholders. In a settlement with the Securities and Exchange Commission, the recently framed MCI agreed to pay shareholders and bondholders $500 million in cash and $250 million in MCI shares. In Jan. 2006, MCI was acquired by Verizon Communications.

Features

• WorldCom was a telecommunications company that failed in 2002 following a monstrous accounting fraud.
• WorldCom remains the greatest accounting scandal in U.S. history as well as perhaps of the biggest bankruptcy.
• Because of the scandal, former CEO Bernard Ebbers was condemned to 25 years in jail, and former CFO Scott Sullivan was condemned to five years.