Accounting Fraud at Worldcom
9-104-071
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 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.
Background
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
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 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.
Background
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