WorldCom bankruptcy

The publicity surrounding the uncovering of the WorldCom fraud resulted in greater auditor oversight over American corporations and greater government oversight over auditors. In 2002, Congress passed the Sarbanes-Oxley Act, which held senior executives responsible for the accuracy and completeness of corporate financial reports.

In 2002, WorldCom was the second-largest long-distance phone company in the United States. It had achieved this size largely by acquisitions, such as that of MCI Communications in 1998. However, the Telecommunications industrytelecommunications industry had begun a downturn in 1999. WorldCom’s stock had begun falling from its high of more than $64 in June of 1999, and its attempt to acquire Sprint in 2000 failed, largely because of government pressure.WorldComBankruptcy;WorldComSarbanes-Oxley Act of 2002Sarbanes-Oxley Act of 2002

EugeneMorse, EugeneMorse, an auditor working under Cynthia Cooper, CynthiaCooper, discovered irregularities that suggested fraud in 2002. Cooper, Morse, and others in the Internal Audit department began an investigation of the fraud, despite being ordered to stop their work by Scott Sullivan, ScottSullivan, WorldCom’s chief financial officer. Fraud;WorldComCooper learned that the company had misallocated nearly $4 billion of expenses. She became fearful of retribution from those who had perpetrated the fraud and worried about all the WorldCom employees who might lose their jobs if the fraud were revealed. Nevertheless, she refused to be intimidated and alerted the company’s outside auditing firm.

On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy, with $107 billion in assets, making it the largest bankruptcy in U.S. history at the time (exceeded by the bankruptcy of Lehman Brothers, with assets of $639 billion, in 2008). After WorldCom entered into bankruptcy, additional audits found other schemes that brought the total fraud to more than $11 billion.

Bernard Ebbers, former WorldCom CEO, leaves Manhattan federal court in 2006.

(AP/Wide World Photos)

In 2005, Sullivan was convicted of securities fraud, conspiracy, and seven counts of filing false reports with regulators, and Chief Executive Officer Bernard Ebbers, BernardEbbers was convicted of securities fraud and conspiracy charges. One of the motivations for creating the fraudulent financial statements was that Ebbers and Sullivan received sizeable bonuses and stock options when the company was profitable. Thus, the company was made to look more profitable than it really was. Ebbers was sentenced to twenty-five years in federal prison for his part in the fraud, and Sullivan was sentenced to five years as part of a plea agreement in which he agreed to testify against Ebbers.

The bankruptcy of WorldCom has often been attributed to its fraudulent accounting. However, most likely neither the fraud nor its discovery are responsible for the downfall. The company’s stock was already falling. Corporate decisions, such as loading the company with debt and making inappropriate acquisitions; the Internet mania that swept the country at the time; and the implosion of the telecommunications industry all played a role in reducing the company’s value. It seems likely that the company was going to go bankrupt because of poor management and that the fraudulent accounting acted primarily to hide the depth of WorldCom’s financial troubles from the world for a while.

Further Reading

  • Colvin, Geoffrey. “The Other Victims of Bernie Ebbers’ Fraud.” Money, August 8, 2005.
  • Cooper, Cynthia. Extraordinary Circumstances: Journey of a Corporate Whistleblower. New York: John Wiley & Sons, 2008.
  • Jeter, L. W. Disconnected: Deceit and Betrayal at WorldCom. New York: John Wiley & Sons, 2003.

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