MCI WorldCom Scandal Essay

Introduction

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MCI WorldCom was one of the largest telecommunications companies in the universe. Bernie Ebbers founded WorldCom in 1983. after that WorldCom began as a re-seller of long-distance telephone services. WorldCom is located at Mississippi. After Ebbers bought about 50 other little long-distance houses. he set his sight on MCI. Thus MCI WorldCom would hold become the 2nd biggest telecom service supplier in 1997. MCI WorldCom was formed on September-15-1998. WorldCom merged with the $ 37 billion MCI Communications Corporations. the company’s operations were organized around three divisions:

* MCI WorldCom
* U. S. telecommunications
* WorldCom International

The MCI WorldCom division is the 2nd largest long distance company in the United States ( after AT & A ; T ) . It has fibre ocular web of 45. 000-mile long. which provides local phone service in more than 100 markets and offers services such as informations. Internet. and other communications services. UUNET WorldCom has a extremely trusted & amp ; dependable anchor web which provides local entree to the Internet to a range of more than 1. 000 locations in and around the United States. Canada. Europe. and the Asia-Pacific part. WorldCom International is non merely a local but besides facilities-based rival in 15 states outside the United States. linking to the company’s overall planetary web to more than 5. 000 edifices in Australia. Ireland. Germany. Hong Kong. Italy. Japan. Mexico Belgium. Brazil. France. The Netherlands. Singapore. Switzerland. Sweden. and the United Kingdom.

Company – Timeline:

Corporate initiation

1983: Businessmens Murray Waldron and William Rector invent a program to make a price reduction long distance supplier called LDDS ( Long-Distance Discount Service ) . 1985: Early investor Bernard Ebbers becomes the first main executive officer of LDDS. 1989: LDDS becomes public through its first
acquisition of Advantage Companies Inc. 1992: LDDS merges in an all-stock trade with price reduction long distance service supplier Advanced Telecommunications Corp.

MCI acquisition

1993: LDDS acquires long distance suppliers Resurgens Communications Group Inc and Metromedia Communications Corp. in a tripartite stock. This creates hard currency dealing that becomes the fourth-largest long-distance web in the United States. 1994: LDDS continues its acquisition fling geting domestic and international communications web IDB Communications Group Inc. in an all-stock trade. 1995: LDDS acquires voice and informations transmittal company Williams Telecommunications Group Inc. for $ 2. 5 billion and changes its name to WorldCom Inc. 1996: WorldCom merges with MFS Communications Company Inc. and UUNet Technologies Inc. 1998: WorldCom completes three amalgamations: with MCI Communications Corp. ( $ 40 billion ) —the largest in history at that time—Brooks Fiber Properties Inc. ( $ 1. 2 billion ) and CompuServe Corp ( $ 1. 3 billion ) .

Proposed Sprint amalgamation
1

999: WorldCom and Sprint Corp. agree to unify.
2000: U. S. and European regulators block proposed amalgamation with Sprint ; WorldCom and Sprint terminate understanding.

Accounting dirts & A ; Bankruptcy

2002: A little squad of internal hearers worked together in secret at WorldCom. During the dark clip. the auditors’ secret probes revealed a $ 3. 8 billion worth of fraud. WorldCom files for bankruptcy protection. naming some $ 107 billion in assets and $ 41 billion in debt. on a amalgamate footing as of March 31. It was the largest such filing in U. S. history. 2003: The Company’s entire assets had been inflated by about $ 11 billion. Creditors had lost religion in the organisation. 2004: MCI officially emerges from bankruptcy. 21 months after registering the largest Chapter 11 instance in history. 2005: Verizon Communications Inc. announces a $ 6. 75 billion trade to purchase MCI Inc. Former WorldCom Inc. main executive Bernard J. Ebbers is found guilty of confederacy. securities fraud and doing false filings with regulators.

Worldcom Top Management Team during Scandal:
CEO – Bernard Ebbers
CFO – Scott Sullivan
Comptroller – David Myers
Director of General Accounting – Buford “Buddy” Yates
Pre-Scam Dayss At WorldCom

LDDS changed its name to WorldCom in 1995. WorldCom was the 2nd largest benchmarked long distance telecom supplier in the USA and the biggest cyberspace traffic bearer in the universe. with a web stretching over 150. 000km. and concern presence in more than 65 states. WorldCom faced explosive growing. at a searing gait over the 15 old ages of its being by geting many companies like MFS Communications Inc. and UUNet Technologies Inc. in 1996. MCI Communication Corp. Brooks Fiber Properties Inc. . CompuServe Comp in 1998. In 2001. it made the largest amalgamation with Intermedia Communication Inc. . an cyberspace and information services supplier. With the acquisitions of UUNet and MCi. WorldCom had control over more than 50 % of the Internet anchor substructure. Every acquisition led to higher stock monetary value which in bend made manner to finance another acquisition. The portion monetary value of WorldCom was at an all clip high of $ 63. 50. on June 18. 1999. with market value of $ 125 billion.

Its value rose to $ 180 billion during the extremum of the telecom roar. Equally long as the stock market was dining and the point com bubble was spread outing. no 1 cared to look into the cardinal stableness of the company. Hearers besides failed to execute thorough due diligence.

WorldCom. in the late 1990’s was besides an attractive coup d’etat mark for Nextel Communications. before the dirt. Scam – How it all happened?

WorldCom. the 2nd biggest long-distance telecom company in US and besides the biggest bearer of Internet traffic in the universe was the new economic system company when it was launched. In its operation of 15 old ages. the company grew at a really rapid gait. majorly due to the aspiration of its former main executive officer ( CEO ) Bernard J. Ebbers. It majorly expanded by geting other smaller companies who had a possible to be their future rivals. The stock market supported them and the company growing was extortionate and no 1 cared about the basicss of the company as it was giving high return twelvemonth on twelvemonth. Below mentioned is the chronological order of happening of events and the exposure of fraud. * March 2002 – The U. S. Securities and Exchange Commission ( SEC ) questioned WorldCom about its accounting processs and about loans it had extended to its officers as it was funny about the principle behind the offers.

* April 2002 – The first mark of failing came when company announced occupation cuts. the figure was 3. 700. Following the even. Standard & A ; Poor’s. Moody’s and Fitch downgraded WorldCom’s recognition evaluation and it was the beginning of the Justice section establishing a investigation into the dirt. * April 2002 – This month itself J. Ebbers resigned as CEO after the flooring disclosure of loaning of $ 339. 7 million to Ebbers to cover loans that he took to purchase his ain portions. * June 25 – The Company revealed that improper accounting of $ 3. 8 billion in disbursals had covered up a net loss for 2001 and the first one-fourth of 2002. The company besides announced that it planned to cast more than 20 % of its work force numeration to be about 17. 000 occupations. * June 26 – The instance was filed by SEC against WorldCom avering them for a securities fraud. It alleged that WorldCom’s top direction “disguised its true operating performance” and “misled investors about its reported earnings” .

Method that WorldCom adopted is been classified as an accounting dirt. the company used its balance sheet to hike grosss and net incomes while concealing outgos. It did so by * Classifying ordinary day-to-day disbursals and long-run disbursals associated with the acquisition of capital assets as investings which led to WorldCom holding a important revenue enhancement advantages. * WorldCom besides tried to conceal disbursals to the sum of about $ 4 billion and alternatively showed them as net incomes in their history books. * Another gambit it employed was utilizing WorldCom’s major operating disbursals related to its “line costs” . the fees that it pays to third party telecom web suppliers for the right to entree their webs. WorldCom capitalised these fees. terming them as investings. when. in fact. they were one of the most of import daily disbursals.

Fiscal experts pointed out that WorldCom’s accounting patterns. made it impossible for investors to estimate the public presentation of the company. They non merely overstated profitableness they besides misled the investors by the opaque nature of its regular operating public presentation. The daze for the people accentuated with disclosure of Arthur Andersen. the discredited auditing and confer withing major as WorldCom’s hearer excessively. The WorldCom’s ain internal audit section was the first 1 who unearthed the fraud of about $ 3. 8 billion in June 2002. The company’s audit commission and board of managers were notified of the fraud and acted fleetly: Sullivan was fired. Myers resigned. By the terminal of 2003. it was estimated that the company’s entire assets had been inflated by around $ 11 billion ( WorldCom. 2005 ) .

Post-Scam Dayss At WorldCom

Around 17. 000 occupations were cut in order to salvage $ 1 billion.

The company had yet to pay many of its creditors. Many of the little creditors included former employees. chiefly those who were dismissed during June 2002. On August 7. 2002. the exWorldCom 5100 group was formed. It included former WorldCom employees with a common end of seeking the benefits and full payment of rupture wage under the WorldCom Severance Plan. The “5100” signifies the figure of WorldCom employees dismissed in June 2002 before WorldCom filed for bankruptcy. In 2004. the company emerged from bankruptcy. with $ 5. 7 billion in debt and $ 6 billion in hard currency. It was renamed MCI. About half of the hard currency was intended to pay assorted claims and colonies. Previous bondholders were paid 35. 7 cents on the dollar. in bonds and stock in the new MCI company. The old stockholders’ stock was cancelled. doing immense loss to shareholders. On February 14. 2005. Verizon Communications acquired MCI for $ 7. 6 billion.

On March 15. 2005 the CEO. Bernard Ebbers. was found guilty of all charges and convicted of fraud. He was accounted for the $ 11 billion accounting dirt. confederacy and filing false paperss with regulator. Many other functionaries were besides charged with condemnable punishments in relation to the company’s fiscal misstatements. These included former CFO Scott Sullivan ( entered a guilty supplication on March 2. 2004 to one count each of securities fraud. confederacy to perpetrate securities fraud. and registering false statements ) . former accountant David Myers ( pleaded guilty to securities fraud. confederacy to perpetrate securities fraud. and registering false statements on September 27. 2002 ) . former accounting manager Buford Yates ( pleaded guilty to confederacy and fraud charges on October 7. 2002 ) . and former accounting directors Betty Vinson and Troy Normand ( both pleading guilty to confederacy and securities fraud on October 10. 2002 ) .

On July 13. 2005 Bernard Ebbers received a sentence of imprisonment for 25 old ages. At that clip. Ebbers was 63 old ages old. On September 26. 2006. Ebbers surrendered himself to the Federal Bureau of Prisons prison at Oakdale. Louisiana. the Oakdale Federal Corrections Institution to get down functioning his sentence. During March 2005. 16 of WorldCom’s 17 former investment bankers reached colonies with the investors. During December 2005. MCI joined Microsoft Corporation by supplying Windows Live Messenger clients “Voice Over Internet Protocol” ( VoIP ) service to do telephone calls. This was MCI’s last new product—- called “MCI Web Calling” . This merchandise was renamed “Verizon Web Calling” . after the amalgamation.

Corporate administration Failure

In 2002. when world’s second largest telecom giant WorldCom filed for bankruptcy at federal tribunal in Manhattan. United States witnessed one of the largest accounting frauds in history. Former CEO of WorldCom. Mr. Bernie Ebbers was held responsible for orchestrating the USD 11 billion accounting fraud and sentenced to 25 old ages in federal prison on July 13. 2005. WorldCom debacle is a clear instance of corporate administration failure. How could a fraud of such outrageousness go unnoticed by the Board of Directors at WorldCom? What happened to industry watchdogs? In WorldCom’s instance. most of the divergences from proper corporate behavior resulted from the failure of Board of Directors to acknowledge and efficaciously cover with the wakes of “greed culture” .

WorldCom’s former CEO Bernie Ebbers’ desire to construct and protect his personal wealth was the drive factor behind the fraud. For this ground. he had to demo continually turning net worth in order to avoid border calls on his ain WorldCom stock that he had pledged to procure loans [ 1 ] . While examining this tremendous failure in corporate administration and what could hold been done to hedge it. we came across an interesting papers entitled “Report of Investigation” dated March 31. 2003. This Report was prepared for. among others. the Federal Bankruptcy Court supervising WorldCom instance [ 1 ] . From the study. we have drawn assorted points to understand the corporate administration failure at WorldCom.

Accounting Misstatements

WorldCom made major accounting misstatements that hid the progressively parlous fiscal status of the company. The Report described the accounting folly as follows: “… Equally tremendous as the fraud was. it was accomplished in a comparatively everyday manner: more than $ 9 billion in false or unsupported accounting entries were made in WorldCom’s fiscal systems in order to accomplish desired reported fiscal consequences. ”

Drivers of the fraud

The motivation factor behind this fraud was the concern scheme ( personal ) of WorldCom’s CEO. Bernie Ebbers. Here was a adult male who put his personal addition above organization’s growing. In the 1990s. Ebbers wanted to accomplish dramatic growing through a series of acquisitions. But. there was a gimmick – He did NOT hold the necessary resources to fund his acquisition orgy. So. he used WorldCom stocks to carry through his shopping ( acquisition ) fling. But. the most of import thing was. WorldCom stock had to continually increase in value to be of any usage to Ebbers personal docket. He felt the demand to turn out ever-growing gross and income. His lone option to carry through this terminal was fiscal gimmickry. However. he faced the age-old job which all conmen face – It is hard to prolong misrepresentation in the long tally!

Complicating Ebbers’ fortunes was an industry-wide slack in telecommunications. During this clip. Wall Street had go oning outlooks of double-digit growing for WorldCom. After all. they had accomplished so much in such a comparatively short period of clip. But. WorldCom needed clip to larn pull offing the new concerns it had acquired. To go on on the way of dual digit growing. WorldCom had to consolidate the acquired concerns and turn them into money coining machines. However. Ebbers did non hold the anchor to stand up and accept that WorldCom needed clip. Alternatively he went in front and presented Wall Street what it expected from WorldCom – Ever-growing grosss and income even when in world none existed. He fudged the company books and met Wall Street’s outlooks.

Another major ground actuating this fraud was Ebbers’ really obvious aspiration to construct and guard his personal fiscal state of affairs. For this ground. he had to demo continually turning net worth in order to avoid border calls on his ain WorldCom stock that he had pledged to procure loans [ 1 ] . He did that.

While most of the studies incrimination Ebbers for the full episode. the Board of Directors are non blameless. WorldCom supported revisionist theoretical account of Corporate Governance – though the Board reigns ( de jure ) . the imperial CEO regulations ( de facto ) . WorldCom’s corporate administration failure resulted in the followers:

* Company filed for bankruptcy
* CEO was sentenced to 25 old ages of imprisonment
* Stockholders saw their portions become useless
* Lenders were strained to take losingss on their loans
* Employees lost occupations

Court Ordered Fix

The Bankruptcy Court directed the freshly constituted Board of Directors and the freshly appointed Corporate Monitor to repair this atrocious illustration of corporate failure. The steps suggested. . .

* A corporate civilization of openness. in which ethical behavior is encouraged and expected. as exemplified by the moralss pledge that the Company and the Corporate Monitor have developed and that senior direction has signed * A corporate civilization in which the advocate of attorneies is sought and valued ; * Formalized and well-documented policies and processs. including a clear and effectual channel through which employees can raise concerns or study Acts of the Apostless of misconduct

Mentions:
1. hypertext transfer protocol: //www. referenceforbusiness. com/history2/10/MCI-WorldCom-Inc. hypertext markup language # ixzz2IriwULfD 2. hypertext transfer protocol: //en. wikipedia. org/wiki/MCI_Inc.
3. hypertext transfer protocol: //www. fundinguniverse. com/company-histories/mci-worldcom-inc-history/ 4. hypertext transfer protocol: //www. washingtonpost. com/wp-dyn/articles/A49156-2002Jun26. html 5. hypertext transfer protocol: //www. ecommercetimes. com/story/45542. hypertext markup language

6. hypertext transfer protocol: //www. sec. gov/Archives/edgar/data/723527/000093176303001862/dex991. htm 7. hypertext transfer protocol: //www. frontlineonnet. com/fl1915/19150810. htm
8. hypertext transfer protocol: //www. defender. co. uk/business/2002/aug/09/corporatefraud. worldcom2 9. hypertext transfer protocol: //www. nytimes. com/2002/07/22/us/worldcom-s-collapse-the-overview-worldcom-files-for-bankruptcy-largest-us-case. html 10. hypertext transfer protocol: //voices. yokel. com/worldcom-scandal-look-back-one-biggest-225686. hypertext markup language? cat=3 11. hypertext transfer protocol: //www. nytimes. com/2002/07/22/us/worldcom-s-collapse-the-overview-worldcom-files-for-bankruptcy-largest-us-case. html 12. hypertext transfer protocol: //www. Google. co. in/url? sa=t & A ; rct=j & A ; q= & A ; esrc=s & A ; frm=1 & A ; source=web & A ; cd=3 & A ; cad=rja & A ; ved=0CDkQFjAC & A ; url=http % 3A % 2F % 2Fmoney. cnn. com % 2F2005 % 2F03 % 2F15 % 2Fnews % 2Fnewsmakers % 2Febbers % 2F & A ; ei=yOkAUZbcKcbirAeVwIC4BA & A ; usg=AFQjCNHSfWmXHV-ryl3POQ1NU_MMYLmvjA & A ; bvm=bv. 41524429. d. bmk 13. hypertext transfer protocol: //www. nytimes. com/2002/07/22/us/worldcom-s-collapse-the-overview-worldcom-files-for-bankruptcy-largest-us-case. html 14. hypertext transfer protocol: //www. Google. co. in/url? sa=t & A ; rct=j & A ; q= & A ; esrc=s & A ; frm=1 & A ; source=web & A ; cd=3 & A ; cad=rja & A ; ved=0CDkQFjAC & A ; url=http % 3A % 2F % 2Fmoney. cnn. com % 2F2005 % 2F03 % 2F15 % 2Fnews % 2Fnewsmakers % 2Febbers % 2F & A ; ei=yOkAUZbcKcbirAeVwIC4BA & A ; usg=AFQjCNHSfWmXHV-ryl3POQ1NU_MMYLmvjA & A ; bvm=bv. 41524429. d. bmk

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