Chapter 24 – WorldCom

Synopsis

Bernie Ebbers and three fellow entrepreneurs launched their own telephone company in 1983. Initially, the company purchased excess capacity from major long-distance carriers and resold the capacity to retail customers. Through a string of mergers and acquisitions, WorldCom became the second largest telecommunications company in the world, behind only AT&T. In 2002, a team of WorldCom internal auditors, working secretly at night to avoid alerting the company’s financial staff, discovered that WorldCom had improperly capitalized $3.8 billion of operating costs. Ebbers was sentenced to 25 years in prison after being convicted on nine counts of conspiracy, securities fraud, and filing false statements with the SEC.

Discussion Questions

  1. How was WorldCom able to report 11 consecutive quarters of double-digit revenue growth between the first quarter of 1999 and the first quarter of 2002?
  2. How did WorldCom understate its line cost expense by $3.3 billion between the second quarter of 1999 and the fourth quarter of 2000?
  3. How did WorldCom understate its line cost expense by $3.8 billion between the first quarter of 2001 and the first quarter of 2002?
  4. What motivated Cynthia Cooper to begin examining WorldCom’s capital expenditures and fixed asset accounts?
  5. What rationale did Scott Sullivan use to try to justify capitalizing WorldCom’s line cost expenses?
  6. What audit procedures did Arthur Andersen perform to test WorldCom’s line costs and capital expenditures? Why were these procedures ineffective?
  7. What criticism did the special investigative committee chaired by Denny Beresford level against Bernie Ebbers?

Additional Resources

Report of the Investigation by the Special Investigative Committee of the Board of Directors of WorldCom, 31 March 2003.

Inside WorldCom. The television series “American Greed” describes the accounting fraud at WorldCom (8:31 minutes).

EY: Interview with David Myers. Former WorldCom controller David Myers discusses his role in the WorldCom accounting fraud (19:33 minutes).