The WorldCom Accounting Scandal

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Case Details:

Case Code : FINC022
Case Length : 19 Pages
Period : 1990 - 2002
Pub. Date : 2002
Teaching Note :Not Available
Organization : WorldCom, Arthur Anderson
Industry : Telecom, Financial Services
Countries : USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Introduction Contd...

From being one of the world's most valuable companies (valued over $ 100 billion at its peak), WorldCom came to be known as one of the biggest instances of the 'fraud wave' sweeping the global corporate world since the late 1990s. The company's downfall from WorldCom to 'WorldCon' is a story of a corporate feeding its greed through financial and accounting manipulations.

Worldcom: The Company

WorldCom was started by Bill Fields in Hattiesburg, Mississippi, in 1983 under the name 'Long Distance Discount Services' (LDDS), providing long distance telecommunication (telecom) services. The venture was profitable right from the start. In 1985, Bernie Ebbers (Ebbers) became the company's CEO.

Ebbers reportedly played a major role in the success of LDDS in the following years. The company went public in 1989 when it acquired Advantage Companies Inc., a publicly traded long distance telecom services company. Throughout the 1990s, the company continued to grow by acquiring various companies and expanding its operations across the world (Refer Table I for the major acquisitions).

In 1992, LDDS acquired Advanced Telecommunications Corp. In 1995, LLDS changed its name to WorldCom, as the management found the new name to be consistent with the company's future growth strategy of building a global presence through acquiring telecom-related companies across the world.

In 1998, WorldCom bought the network units of America Online and CompuServe. However, WorldCom's biggest deal was that of acquiring Microwave Communication Inc (MCI)⁵ for an estimated $ 40 billion in the same year. The company now operated under the name 'MCI WorldCom.'

To complete the merger that year, MCI sold its Internet access business to Cable & Wireless plc (a leading communication company), and British Telecommunications (BT) ended its partnership with the company and bought MCI's Concert Communication⁶ stake. Bert Roberts (Roberts), CEO-MCI was made the Chairman of MCI WorldCom, and Ebbers, the CEO...

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5] Microwave Communications, Inc. (MCI) was formed in 1963 by John Goeken to offer long-distance phone services. In 1993, British Telecommunication (BT) acquired a 20% stake in MCI and formed a global joint venture called Concert Communication.

6] Concert Communications was a joint venture between BT and MCI.