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.
- 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.
This spate of corporate violation led to the
Bernard Ebbers was convicted on nine counts of securities fraud and sentenced to 25 years in prison in 2005. Prior CFO Scott Sullivan received a five-year jail sentence after pleading guilty and testifying against Ebbers. On December 18, 2019, Ebbers was bestowed early release from prison for health reasons after serving 14 years of his sentence.
Thanks to debtor-in-possession asset from Citigroup, J.P. Morgan and G.E. Capital, the company would survive as a going concern when it emerged from bankruptcy in 2003 as MCI—a telecom visitors WorldCom had acquired in 1997. However, tens of thousands of workers lost their jobs.
Without admitting debit, Worldcom’s former banks, including Citigroup, Bank of America, and J.P. Morgan, would settle lawsuits with creditors for $6 billion. Of that amount, here $5 billion went to the firm’s bondholders, with the balance going to former shareholders. In a settlement with the Refuges and Exchange Commission, the newly formed MCI agreed to pay shareholders and bondholders $500 million in cash and $250 million in MCI servings.