WorldCom, formerly known as LDDS, was a major telecommunications company that took the industry by storm in the late 1990s by merging with several other companies of the sort. After acquiring a number of businesses, such as IDB Communications Group, Williams Telecommunications Group, and MCI Communications Corp, WorldCom’s acquisition proposal to merge with Sprint was rejected in 2000. Sadly, this was only the beginning of the downfall of the industry leader of the time.
On March 11, 2002 the SEC requested information regarding WorldCom’s accounting methods and loans to officers. Soon thereafter, the company’s stock price fell from $64 to $2.65, and the company declared they would be cutting 6% of WorldCom’s group staff (Reuters, 2005). Why such a huge plummet you might ask? According to an article from the Maryland School of Law, on June 25, 2002, WorldCom announced that it had “overstated earnings in 2001 and the first quarter of 2002 by more than $3.8 billion” (Lyke & Jickling, 2002). In order to inflate the company’s profits, WorldCom had recorded current expenses as capital expenditures and later admitted that the reserve accounts had also been misappropriated. The sad part is, the company’s external auditing firm, Arthur Anderson, “had worked with Scott Sullivan (CFO), David Myers (Controller) and Buford Yates (Directors of General Accounting) to increase the price of WorldCom’s stock by falsely inflating the profitability” (WorldCom Fraud). In 2005, Ebbers was sentenced to 25 years in prison with charges of fraud, conspiracy, and filing false documents. Other executives associated with the WorldCom fraud were also found guilty.
There are several reasons that drive executives of a company to commit fraud, such as to maintain a reputation, manage the large amount of pressure on their shoulders, and sustain their own financial status. In the case of WorldCom, the tremendous growth that took place in the 1990s caused the company to be the leader of the telecommunication industry at that time, and therefore required them to uphold a high reputation. After the rejected Sprint merger proposal, Ebbers “wished to maintain the company’s increasing revenue and income so that the company could show a positive financial picture to its investors” (WorldCom Fraud). Unfortunately, this continuous pressure drove executives to begin underreporting expenses and reducing the reserve accounts.
Another reason that causes executives to commit fraud is the overwhelming amount of weight they have to carry in order for the company to be successful. For example, WorldCom had acquired a large amount of other telecommunication businesses in a short period, and the company was not exactly prepared for the amount of time it would take to adjust accounting procedures; this also lead to the misstatements. Lastly, executives are sometimes compelled to commit fraud because of their own personal status. In the WorldCom example, another reason fraud was committed is because Ebbers was not only worried about the reputation of the company, but he was also concerned about his individual financial standing. If WorldCom’s stock price was not increasing, neither was his salary.
Written by: Shelby Wakefield
Lyke, B., & Jickling, M. (2002, August 29). WorldCom: The Accounting Scandal. Retrieved July 29, 2015.
Reuters. (2005, March 15). WorldCom Company Timeline. Retrieved July 29, 2015.
WorldCom Fraud was Committed in Two Main Ways. (n.d.). Retrieved July 29, 2015.
Fraud In Accounting 
I think that what people will do for money is absurd. I knew that WorldCom had committed fraud, but not to what extent. It’s sad that they had to come out and tell the public what they were doing because their stock prices fell. There is no telling how long the fraud would have continued if they had not been caught since their external auditors was in on it.
It’s possible that Arthur Andersen would have still been around and in the Big 4 if it had not helped commit fraud. I believe that if you are an unethical person, you should not work in business and definitely not accounting. If it was not for this incident, we would not have the strict rules, but I am thankful for the rules. Older Accountants might think they are absurd, but this is how I learned accounting, so it’s just normal to me. It’s unfortunate that these events had to take place, but something good came from them.
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Shelby did a great job of explaining how WorldCom collapsed as a company due to fraud. All of the pressures or reputation and impressing stockholders caused the company to overstate earnings, which is a huge no-no. The company was found guilty of fraud and conspiracy and a few executives were sentenced to prison.
The sad part of all this is that the company was just on the rise as the leader of the telecommunication industry and then this happens. Along with trying to increase stock prices, Arthur Anderson, an external auditing firm, had also helped with the conspiracy .What happened at WorldCom is used as the example of what not to do in all ethics classes at universities around the country.
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This fraud scheme has always been one of the most popular crimes discussed when talking about accounting. After all I have learned about WorldCom, I learn more every time I read something new. It is so hard to believe that so many executives in one company can be so corrupt! You would think that at least one of them would have said something, or tried to stop the illegal practices.
Another thing I just do not understand is why Arthur Andersen would help WorldCom deceive everyone. As a Big Five accounting firm, at the time, they should have known better. I believe they did know better. Arthur Andersen was involved in several accounting scandals, aside from just WorldCom. They were also involved in the Enron scandal around the same time. The reputation of this firm was absolutely ruined after the early 2000s. I think companies can learn from this: if your audit firm has a history or scandalous actions, you may need to find a new auditor. I also believe that the corruption on the executive committee at WorldCom should have made better choices. The company might still be in business if they had.
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Shelby, this is a great post! The fall of Worldcom was a fascinating story that Ms. Kelly shared with us in my first accounting class. It made me very interested in accounting right off the bat. It is amazing that executives would go to the extreme like they did in this case for their reputation. Although the consequences of doing the right thing can be tough sometimes personally, they must be done. This was a very good read for anyone in student in the school of business.
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Along with Worldcom, there are many other companies that committed fraud by inflating their stock prices. Enron was one of them, and along with Worlcom, they also colluded with Arthur Anderson. Before the enactment of Sarbanes Oxley on July 2002, it was easy for companies like Worldcom and Enron to commit acts like these.
Now, after the enactment of Sarbanes Oxley, the SEC made harder it not only for companies but for auditors as well to collude and to commit fraud. Firms are no longer allowed to audit and consult companies at the same time as this can yield to collusion. In the future, the SEC will focus on the subject of IPE, information provided by the entity, to make sure that auditors are clearly testing these documents or support provided by the company to test for accuracy and completeness.
-Franz Limeta
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I remember in Ethics we had to read Extraordinary Circumstances by Cynthia Cooper, the internal auditor who discovered the fraud at WorldCom. It was interesting to learn about the company from the beginning to their slow downfall. It is always fascinating to learn about the crazy things companies do to commit fraud and the reasons behind it. In this case, Ebbers pushed the company to be more and more successful, without realizing the impact it would have for the company in the long run.
It is unbelievable that a company can overstate their earnings by $3.8 billion and not expect there to be consequences. While Arthur Anderson helped WorldCom achieve their fraudulent financial reports, they also played a big role in the fraud at Enron as well. I think their associations with these two companies is the reason they are no longer around. Hopefully with the growth of stricter regulations for internal and external auditors, we won’t see many big fraud cases like this again.
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Layman:
WorldCom was certainly a notorious case of fraud in recent history. To be frank I do not know much about the details, and this post gave some insight into what caused its downfall. However, there are a few things that I am not clear about. There is mention of an Ebbers, and after reading the post multiple times, I am still not sure who (s)he was and what role (s)he played. The post mentions that other people were found guilty of fraud but not if they served time. In addition it would have been interesting to know what triggered the SEC’s investigation into WorldCom. Was the growth unrealistic? Was there a whistle blower involved? Did the rejection of the merger have something to do with it? Whatever it was, it would be good knowledge of have.
There are other things that I am wondering about. The post mentioned loans made to officers. What exactly was happening there? I know sometimes that happens and to my knowledge it is not always illegal, so I am curious as to why it posed a problem. Were the loans used to cover up the fraud? Also, several factors that contribute to fraud were listed, but a potential factor is missing. An extravagant lifestyle/people living beyond their means has played a part in almost all recent instances of fraud; this may have been significant, especially in light of the post mentioning that Ebbers was concerned with his financial standing. Although making more money is always nice, not getting bonuses is only a problem when you rely upon them to fund your lifestyle.
I really enjoyed this post, and I would like to more about it. I think it would definitely be beneficial to do some personal research. Studying past cases of fraud is a means to avoiding it in the future, so I am glad your group went with this topic.
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