Worldcom Case Study

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The financial world was rocked by accounting scandals in the late 1990s and early 2000s. Companies such as Enron, Global Crossing and Tyco International collapsed under the weight of fraud and destroyed investor confidence in corporate accounting. But the biggest collapse was that of WorldCom. In 1983 Bernie Ebbers and several other people invested in a newly formed company in Clinton, Mississippi called Long Distance Discount Services, Inc. (LDDS). LDDS was a provider of long distance telephone service to residential and commercial markets. Ebbers became CEO of LDDS in 1985. In 1989 the company merged with Advantage Companies, Inc. and became publicly traded. In 1995 the company name was changed to LDDS WorldCom, and later to just WorldCom. WorldCom grew to be the second largest U.S. long distance provider, second only to AT&T, primarily through acquisitions. Among the companies it bought or merged with were Advanced Communications Corp (1992), Metromedia Communication Corp. (1993), Reurgens Communications Group (1993), IDB Communications Group, Inc. (1994), Williams Technology Group, Inc. (1995), and MFS Communications Company (1996). The MFS acquisition included UUNet Technologies, Inc. In February, 1998 WorldCom purchased CompuServe, kept its Network Services Division, sold its online service to America Online and acquired AOL’s network division. On November 10, 1997 WorldCom merged with MCI Communications. In 1999 MCI WorldCom announced a planned merger with Sprint for $129 billion. The US Department of Justice and the EU put pressure on the companies to forego the merger due to concerns about monopoly. The merger was terminated on July 13, 2000 and the company was renamed, once again, WorldCom (MCI Inc.). The telecommunications industry entered a downturn in 1998, shortly after WorldCom acquired MCI. The basic problem faced by WorldCom was the “vast oversupply in telecommunication capacity that emerged in the 1990s, as the industry rushed to build fiber optic networks and other infrastructure based on overly optimistic projections of Internet growth”. Telecommunication firms “faced reduced demand as the dot-com boom ended and the economy entered recession”. Their revenues fell short of expectations, while the debt taken on to finance mergers and infrastructure investment remained (Lyke and Jickling, para. 5). As WorldCom’s stock prices began to fall the company, under the direction of CFO Scott Sullivan, Controller David Myers and Director of General Accounting Buford Yates, “used fraudulent accounting methods to mask its declining financial condition by painting a false picture of financial growth and profitability” (MCI Inc.). As stated in the CRS Report for Congress, “The desire to avoid or postpone stock market losses of this magnitude creates a powerful incentive for corporate management to engage in accounting practices that conceal bad news” (Lyke and Jickling, para. 6). Expenditures incurred by a company in its normal operations are treated as current or operating expenses. Examples would include recurring costs such as wages, insurance, equipment rental, electricity and maintenance contracts. Other expenditures, most commonly those which result in the acquisition of, or improvement to, the company’s assets, are treated like capital expenditures. Purchases of real estate, manufacturing equipment, or computer equipment are examples of capital expenditures. Operating expenses are reported on a company’s Income Statement as deductions from revenues in the period in which they occur or are paid, resulting in net income. In contrast, capital expenditures are not reflected on the Income Statement. Instead, they are reported on the company’s Balance Sheet as an asset, and, depending on the nature of the asset and its expected useful life, are subject to depreciation. Depreciation writes off a portion of an asset’s value over a number of accounting periods. The portion of the asset’s value which is...
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