Corporate Governance

WorldCom Submitted to: Prof. Dr. Muhammad Usman Submitted by: Sehrish Arshad 1001 Ayesha mehmood 1014 Sadia Aslam 1022 Fahad saleem 1119

Corporate Governance
WorldCom was founded in1983 by Bernard Ebbers,David Singleton and Murry Waldren. A long distance company on napkin in a coffee shop in Hattiesburg, initially called LDDS. Ebbers elected as president and CEO of company. In 1989, LDDS became a public company, started with about $650,000 in Capital. In 80s and early 90s it followed a series of more than 60 mergers and acquisitions. The strategy behind this was to deliver economies of scale and make it big blooming telecom market. On 25th May 1995, company officially changed its name to WorldCom. In 1996, WorldCom purchased MFS communication Inc. MFEs internet subsidiary, UUNET gave it substantial international presence. By 2002, it became the No.2 residential long-distance carrier in US. Ebbers became famous for the way he had engineered the success of WorldCom. He was rated richest person of America by Forbes. In 1999, WorldCom attempted to acquire another telecom company, however Department of justice objected this move smelling something fishy in the deal. WorldCom officials realize that merger were not a sustainable growth strategy.by 2002, WorldCom growth started melting down. In 1999, its stock was trading at double digit figure, but by January it had become worthless. CFO Scott was fired by board, trading of shares was stopped and department of justice asked for investigation and rework its financial statements for 2001 and 2002.With falling value of WorldComs shares, huge debts and pressure from investing public, Ebbers resigned in April 2002. John Sidgmore took over as CEO and appointed KPMG as company new auditor. WorldCom had made unrealistic financial targets and fail to meet them. Sullivan used accounting treatments that had no base in GAAP. A careful analysis by KPMG revealed that the company was capitalizing its line costs, major operating expenditure for long distance carriers. KPMG auditor discovered that this line cost thereby spreading over many years. This accounting treatment affected the pre-tax income figures and earnings. When statements were reworked it was noted that in some cases where WorldCom reported profit for quarters, the company actually had incurred a loss. In July 2002, KPMG also announced another irregularity. The reserve accounts, was manipulated by company to increase the net income figure. WorldCom set up reserves for line costs payments, but bills were generally not paid for several months after the cost were incurred. WorldCom executive submitted dubious financial statements to the SEC. WorldCom created two versions of accounts-the actual version, reflected the actual operating expenses and final version that was rigged to meet market expectations. WorldCom has variety of people cultures accounting practices and business strategies. Company has acquired as many as 60 business entities each of which has own set of culture. Various department of the corporate office such as finance legal network operations and human resources were located in different cities hundreds of miles away from one another. It was reported that many employee were unaware of the existence of an internal audit department. Company had a hodgepodge culture with no well-defined rules of behavior for anyone. Culture of the company was also very hierarchical. Company encouraged the attitude that employees should do what they are told and not to ask any question entries were not supported with proper documentation prepare the reports that were false. Department of company was dispersed and difficult to interact with one another. Ebbers restored to a series of mergers and acquisitions taking over 60 companies in all to build his empire. Nearly all of the transactions were financed by highly valued WorldCom stock to finance by booming stock market of the mid and late 1990s.industry growth slowdown and the economy entered a recession the company stock prices fell from as high as $64 to $2.value of stock was almost worthless. Ebbers took personal loan of $400 million in 2002 to pay off part of his debt. M.com 4th semester Page 1

Corporate Governance
Bernard Ebbers the CEO of WorldCom neither the qualified not experience enough to lead a telecommunication giant of such size and stature. He was the former basketball coach. Ebber was more interested in his own fortunes rather than creating long term shareholding values. He did not provide the necessary leadership to see the company through hard days in a legitimate manner. He might not know the exact nature of accounting treatment. During the mid-1990s WorldCom business was booming with the telecom industry and the economy in general growing rapidly. In late 1990s economic scenario of country took drastic change. The telecom industry slowed consumer prices was intensified and a rise in the demand for mobiles phones affected the income statement of almost all telecom companies WorldCom was no exception to this. The US Telecommunication Act OF 1996 was intended to improve competition in the telecom industry. Several companies sprang up to meet surge in the demand for telecom services furthered by an overly optimistic projection of internet growth. Most of the companies borrowed heavily to expand their capacities. The demand for the revenue growth was so intensive. The aim was to report the high earnings ratio and income compared to the estimate. Top management in the company resort irregularities to boost if not maintains the E/R ratio. Richard Breeden the man whom SEC nominated as the Corporate Monitor to ensure the restructuring of WorldCom after it filed for bankruptcy indicated the WorldCom collapse could have been avoided had the board of directors been more alert and was aware of the malpractices taking place within the company. The board has been criticized for being unable to control the CEO. The directors were indulged in lavish spending and were richly compensated and were evidently by their huge salary and service brokerage. The audit committee spent as little as three to 6 hours per year in carrying out its functions. Loans were used to purchase various unrelated and usually overvalued business which Ebbers used for his own entertainment the compensation committee also approved a huge severance package for Ebbers and his wife amounting $50 million. Decline in the value of stock; the collapse of WorldCom affected its stakeholders to a great extent. The company also wrote off about $82 million of its assets. The shares value declined by 95 per cent leaving investors penniless. Millionaires became paupers overnight. Workforce cut down drastically; The Company cut down its work force by 17000 and about 3500 had to leave within a week of the company filing for bankruptcy and workforce of about 40000 employees. Customers; WorldCom bankruptcy jeopardized service to its 20 million retail customer a part from the many government contract, affecting 80 million social security beneficiaries. Customers were not able to switch to other service providers as a full scale switch could take months. UUNET handles more than 40 per cent of the US interest traffic including a majority of email sent within the United States and the rest of the world. Financial institution; Twenty five banks have sued WorldCom for defaulting on its loan payment amounting to $.6 billion. The Indian connection; WorldCom owes VSNL approximately rs.400 crores. The two companies had signed an agreement to carry each other long distance traffic to and from their respective countries. WorldCom financial auditors that had served as its external auditors since 1989 denied any knowledge of the accounting malpractices resorted to by WorldCom officials. The audit firm maintained that Sullivan had withheld information from them during the audits. Andersen has been criticized for the inept handling of WorldCom accounting policies, systems and books. Andersen should have taken into account the shockingly large and increasing financial loss of WorldCom and paid more attention to the possibility of aggressive accounting practices, especially when it was aware of such precedents in other corporation whose accounts it audited. M.com 4th semester Page 2

Corporate Governance
A review of the loans approved by the board of directors of WorldCom to CEO Ebbers, and the financial health of the company was undertaken. In June 2002, the SEC filed fraud charges against the company. The company had uncovered $11 billion in accounting fraud and had reported earnings and understated expenses to the tune of $74.5 billion. The jury, however, refused to buy the argument that a manipulation of such a large extent could go unnoticed by the CEO of the company. The jury convicted Bernard Ebbers of conspiracy securities fraud and filling of false documents with the SEC, and sentenced him to a prison term of 25 years.

M.com 4th semester

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