Formerly known as WorldCom, now known as MCI, this U.S.-based telecommunications company was at one time the second-largest long distance phone company in the U.S. Today, it is perhaps best known for a massive accounting scandal that led to the company filing for bankruptcy protection in 2002.
In 1998, the telecommunications industry began to slow down and WorldCom's stock was declining. CEO Bernard Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses endeavors. The company's profitability took another hit when it was forced to abandon its proposed merger with Sprint in late 2000. During 2001, Ebbers persuaded WorldCom's board of directors to provide him corporate loans and guarantees totaling more than $400 million. Ebbers wanted to cover the margin calls, but this strategy ultimately failed and Ebbers was ousted as CEO in April 2002.
Beginning in 1999 and continuing through May 2002, WorldCom, under the direction of Scott Sullivan (Chief Financial Officer), David Myers (Senior Vice President and Controller) and Buford Yates (Director of General Accounting), used shady accounting methods to mask its declining financial condition by falsely professing financial growth and profitability to increase the price of WorldCom's stock. The fraud was done in two main ways. First, WorldCom's accounting department underreported “line costs”, which are interconnection expenses with other telecommunication companies, by capitalizing these costs on the balance sheet rather than properly expensing them. Second, the company inflated revenues with bogus accounting entries from “corporate unallocated revenue accounts”.
The first discovery of possible illegal activity was by WorldCom's own internal audit department who uncovered approximately $3.8 billion of the fraud in June 2002. WorldCom said it will restate its financial results for all of 2001 and the first...