Worldcom’s Whistleblower
WORLDCOM’s WHISTLEBLOWER
Introduction:
What began as a routine internal audit, transformed into the largest accounting manipulation of all time. Worldcom, a leading telecommunications company built from over 70 acquisitions, found itself ranked at the top of its class for illegal and creative accounting practices. Worldcom leaders successfully managed to erode the company market value from $180 billion in 1999 to approximately $350 million today.
In June of 2002, Cynthia Cooper, Vice President of internal audit, uncovered suspicious capitalizing of line costs that had been treated as expenses in prior years. Cooper brought the "accounting discrepancy" to the attention of Scott Sullivan, Chief Financial Officer at the time. Sullivan dismissed Cooper's concerns and attempted to convince her to postpone the audit. Unfortunately for Sullivan and Ebbers, Cooper continued her investigation and presented her findings to Max Bobbitt, Head of Worldcom's Audit Committee, who then informed the rest of the committee and KPMG. The Worldcom empire began to shake.
At first, the issue in question was approximately $4 billion of misallocated line costs in the financial statements beginning in 2001 to the first quarter of 2002. By capitalizing these expenses, Worldcom managed to "produce" profits for five quarters that would have otherwise shown loses. As if that were not bad enough, other fraudulent accounting practices were unveiled going back to 1999. An additional $2 billion reserved for bad debts was improperly used to boost operating income. Other accounting manipulations included inflating profit-margin figures by arbitrarily reducing line costs and maintaining fake accounts on the accounts receivables books. In total, Worldcom almost successfully misrepresented profits by approximately $7 billion with an additional $2 billion in question.
Summary:
The Worldcom failure was a shock to many, but reality is, there were many "warning signs" that indicated trouble as
Introduction:
What began as a routine internal audit, transformed into the largest accounting manipulation of all time. Worldcom, a leading telecommunications company built from over 70 acquisitions, found itself ranked at the top of its class for illegal and creative accounting practices. Worldcom leaders successfully managed to erode the company market value from $180 billion in 1999 to approximately $350 million today.
In June of 2002, Cynthia Cooper, Vice President of internal audit, uncovered suspicious capitalizing of line costs that had been treated as expenses in prior years. Cooper brought the "accounting discrepancy" to the attention of Scott Sullivan, Chief Financial Officer at the time. Sullivan dismissed Cooper's concerns and attempted to convince her to postpone the audit. Unfortunately for Sullivan and Ebbers, Cooper continued her investigation and presented her findings to Max Bobbitt, Head of Worldcom's Audit Committee, who then informed the rest of the committee and KPMG. The Worldcom empire began to shake.
At first, the issue in question was approximately $4 billion of misallocated line costs in the financial statements beginning in 2001 to the first quarter of 2002. By capitalizing these expenses, Worldcom managed to "produce" profits for five quarters that would have otherwise shown loses. As if that were not bad enough, other fraudulent accounting practices were unveiled going back to 1999. An additional $2 billion reserved for bad debts was improperly used to boost operating income. Other accounting manipulations included inflating profit-margin figures by arbitrarily reducing line costs and maintaining fake accounts on the accounts receivables books. In total, Worldcom almost successfully misrepresented profits by approximately $7 billion with an additional $2 billion in question.
Summary:
The Worldcom failure was a shock to many, but reality is, there were many "warning signs" that indicated trouble as