WorldCom Inc.

9 Aug 2011

Anmol Avinash Kanwalpreet Manish Nishit

Objectives
To

study downfall of the telecom giant and after effects on the US financial market. Corporate governance Ethical leadership Corrupt Behavior

WorldCom Background
World

com was a pre-eminent global telecom company ranked fourth in the fortune 500 list. It was set up in 1983 predominately as a Long Distance Discount Service (LDDS). Had a network reach in more than 65 countries including Europe, North and South America , and Asia Pacific region. Assets in excess of 103 billion $.

Rise Of WorldCom

WorldCom flourished with sky rocketing pace through mergers and acquisitions.

WorldCom merger with Brooks enabled it to get control of the state-of-the-art fibre optic networks and other facilities owned by it. In 2001, WorldCom recapitalized two separate trading stocks WCOM and MCIT to manage the increased infrastructure because of Mergers and Acquisitions.

In 1985, Bernard Ebbers became the CEO of the LDDS and in 1989 it became public by acquiring Advantage Companies Inc. In 1992 , it merged with another LDDS Advanced telecommunication company. After these mergers MCI WorldCom became the sixth ranked company in Fortune list.

Reasons For Downfall

The internet bubble burst in 2000 took down many of the WorldComs biggest customers. Telecommunication industry slowdown resulted in heavy debt and inefficiency in generating revenues for WorldCom. Manipulation of funds from line cost expenses to capital accounts. Loan of more than 400 million $ to Ebbers at meagre interest rate of 2.15% to payoff his personal liabilities.

Reasons For Downfall (contd)

Individualistic

culture as company was run by Ebbers and his associates. Company was rooted from top to bottom. Steve Brabbs early disclosure of mismanaged line cost funds in early 2000 was suppressed by company officials. Company policy and behavior was biased towards top officials.

Consequences
Rating

agencies (S&P and Moodys) downgraded the credit rating of Worldcom and removed it from S&P 500 index. Stock prices touched to an all time low. Workforce was downsized. Dividends were suspended. Heavy cut in expenditures.

Graphical Stock Chart

Points Of Discussion

Company retained its position in Fortune list in spite of the continuous decline in its stock prices. Steve Brabbs disclosed an accounting error in line costs in early 2000 to make WorldComs international figure look better . Manipulation of line cost funds by CFO and Controller in accounting records to hide debts and make financial figures look better. 4 billion $ account cover up disclosed later on only when an independent audit was done.

Points Of Discussion (contd)

Role

of internal and external auditor. Role of the board of directors. Role of investment bankers

Observations
Company

employees were not allowed to question plans, decisions and actions of top bosses. Loyalty to top bosses were rewarded with special rewards and bonuses. Cooper routine operational audit was restricted by CFO and controller for complete information.

Observations (contd)
Top

bosses were self indulgent . Fall in stock prices even there was increase in profits and revenues. External auditors were same for 12 years.

Conclusions & Recommendations

Internal auditors should have been given more information from the management side. Checks and balances should have been there in a much earlier stage and the Board members should more prominent towards their approach. Accounting practices like these not only install distrust in financial institutions but also in government factions like the SEC that were created and funded for the sole purpose of preventing things like this from happening. Investors would have suspected a little better job at finding problems in the system