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What happened to Worldcom?

What Was WorldCom?

WorldCom was not righteous the biggest accounting scandal in the history of the United States—it was also one of the biggest bankruptcies of all time. The revelation that telecommunications Goliath WorldCom had cooked its books came on the heels of the Enron and Tyco frauds, which had rocked the financial markets. Come what may, the scale of the WorldCom fraud put even them in the shade.

Key Takeaways

  • WorldCom was a telecommunications company that went bankrupt in 2002 take the place of a massive accounting fraud.
  • WorldCom remains the biggest accounting scandal in U.S. history as well as one of the largest bankruptcies.
  • As a denouement of the scandla, former CEO Bernard Ebbers was sentenced to 25 years in prison, and former CFO Scott Sullivan was sentenced to five years.

View WorldCom and Bernie Ebbers

WorldCom has become a byword for accounting fraud and a warning to investors that when hang-ups seem too good to be true, they just might be. Its CEO, Bernie Ebbers—a larger-than-life figure whose trademark was cowboy boots and ten-gallon hat—had built the enterprise into one of America’s leading long-distance phone companies by acquiring other telecom companies. At the peak of the dotcom seethe, its market capitalization had grown to $175 billion.

When the tech boom turned to bust, and companies slashed squander on telecom services and equipment, WorldCom resorted to accounting tricks to maintain the appearance of ever-growing profitability. By then, sundry investor had become suspicious of Ebbers’ story—especially after the Enron scandal broke in the summer of 2001. Curtly after Ebbers was forced to step down as CEO in April 2002, it was revealed that he had, in 2000, borrowed $400 million from Bank of America to act margin calls, using his WorldCom shares as collateral. As a result, Ebbers lost his fortune. In 2005 he was convicted of safe keepings fraud and sentenced to 25 years in prison.

Cooking the Books

This was not a sophisticated fraud. To hide its falling profitability, WorldCom grandiloquent net income and cash flow by recording expenses as investments. By capitalizing expenses, it exaggerated profits by around $3 billion in 2001 and $797 million in Q1 2002, reporting a profit of $1.4 billion rather than of a net loss.

WorldCom filed for bankruptcy on July 21, 2002, only a month after its auditor, Arthur Andersen, was convicted of forbidding of justice for shredding documents related to its audit of Enron. Arthur Andersen—which had audited WorldCom’s 2001 monetary statements and reviewed WorldCom’s books for Q1 2002—was found later to have ignored memos from WorldCom leaderships informing them that the company was inflating profits by improperly accounting for expenses.

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One comment

  1. I use to work for MCI in Crystal City and won lots of awards. There was plenty of food because it was our international Center which was made up of all cultures. It was a fun environment which made it hard to know that all of this stuff was going on behind the scenes.

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