Accounting Fraud at Worldcom

8726 Words Apr 20th, 2013 35 Pages
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REV: SEPTEMBER 14, 2007

ROBERT S. KAPLAN
DAVID KIRON

Accounting Fraud at WorldCom
WorldCom could not have failed as a result of the actions of a limited number of individuals. Rather, there was a broad breakdown of the system of internal controls, corporate governance and individual responsibility, all of which worked together to create a culture in which few persons took responsibility until it was too late.
— Richard Thornburgh, former U.S. attorney general1
On July 21, 2002, WorldCom Group, a telecommunications company with more than $30 billion in revenues, $104 billion in assets, and 60,000 employees, filed for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code. Between 1999 and 2002, WorldCom
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These line-cost expenses were a significant cost for all long-distance carriers.
LDDS started with about $650,000 in capital but soon accumulated $1.5 million in debt since it lacked the technical expertise to handle the accounts of large companies that had complex switching systems. The company turned to Bernard J. (Bernie) Ebbers, one of its original nine investors, to run things. Ebbers had previously been employed as a milkman, bartender, bar bouncer, car salesman, truck driver, garment factory foreman, high school basketball coach, and hotelier. While he lacked technology experience, Ebbers later joked that his most useful qualification was being “the meanest
SOB they could find.”4 Ebbers took less than a year to make the company profitable.
Ebbers focused the young firm on internal growth, acquiring small long-distance companies with limited geographic service areas and consolidating third-tier long-distance carriers with larger market shares. This strategy delivered economies of scale that were critical in the crowded longdistance reselling market. “Because the volume of bandwidth determined the costs, more money could be made by acquiring larger pipes, which lowered per unit costs,” one observer remarked.5
LDDS grew rapidly through acquisitions across the American South and West and expanded internationally through acquisitions in Europe

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