REV: SEPTEMBER 14, 2007
ROBERT S. KAPLAN
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 had overstated its pretax income by at least $7 billion, a deliberate miscalculation that was, at the time, the largest in history. The company subsequently wrote down about $82 billion (more than 75%) of its reported assets.2 WorldCom’s stock, once valued at $180 billion, became nearly worthless. Seventeen thousand employees lost their jobs; many left the company with worthless retirement accounts. The company’s bankruptcy also jeopardized service to WorldCom’s 20 million retail customers and on government contracts affecting 80 million Social Security beneficiaries, air traffic control for the Federal Aviation Association, network management for the Department of Defense, and long-distance services for both houses of Congress and the General Accounting Office.
WorldCom’s origins can be traced to the 1983 breakup of AT&T. Small, regional companies could now gain access to AT&T’s long-distance phone lines at deeply discounted rates.3 LDDS (an acronym for Long Distance Discount Services) began operations in 1984, offering services to local retail and commercial customers in southern states where well-established long-distance companies, such as MCI and Sprint, had little presence. LDDS, like other of these small regional companies, paid to use or lease facilities belonging to third parties. For example, a call from an LDDS customer in New Orleans to Dallas might initiate on a local phone company’s line, flow to LDDS’s leased network, and then transfer to a Dallas local phone company to be completed. LDDS paid both the 1 Matthew Bakarak, “Reports Detail WorldCom Execs’ Domination,” AP Online, June 9, 2003. 2 WorldCom’s writedown was, at the time, the second largest in U.S. history, surpassed only by the $101 billion writedown taken by AOL Time Warner in 2002.
3 Lynne W. Jeter, Disconnected: deceit and betrayal at WorldCom (Hoboken, NJ: John Wiley & Sons, 2003), pp. 17–18.
________________________________________________________________________________________________________________ Professor Robert S. Kaplan and Senior Researcher David Kiron, Global Research Group, prepared this case. The case was developed from published sources and draws heavily from Dennis R. Beresford, Nicholas deB. Katzenbach, and C.B. Rogers, Jr., “Report of Investigation,” Special Investigative Committee of the Board of Directors of WorldCom, Inc., March 31, 2003. References to this report are identified by alphabetic letters which refer to information in the endnotes. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2004, 2005, 2007 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
Accounting Fraud at WorldCom...