WorldCom’s Bankruptcy Crisis and Financial Performance

 

WorldCom’s Bankruptcy Crisis

Introduction

Murray Waldron and William Rector, two Hattiesburg businessmen, founded this company in 1983. Bernard Ebbers was the company's first CEO. For the next 15 years, it expanded rapidly. Long Distance Discount Service (LDDS) was the company's original branding, which was later changed to WorldCom. It is well-known for delivering telecommunication services to its customers all over the world. It was now America's second-largest contact firm. Instead of becoming the world's biggest telecommunications services company, it became the country's largest bankrupt filler. And the second-largest accounting blunder of the twenty-first century.

Prior to Bankruptcy, Financial Performance

The company gained momentum in the 1990s as a result of a flood of mergers and acquisitions. ATC (Advanced Telecommunications Corporation) paid $ 720 million for WorldCom in 1992, beating main rivals Sprint Corporation and AT&T to become a major player in telecommunications. IDB Communications Group, Inc. was discovered in 1994, Williams Technology Group, Inc. was discovered in 1995, MFS Communications Company was discovered in 1996, and MCI was discovered in 1998. Metromedia Communication Corp. and Resurges Communications Group were discovered in 1993, IDB Communications Group, Inc. was discovered in 1994, Williams Technology Group, Inc. was discovered in 1995, MFS Communications Company was discovered in 1996, and MCI was discovered in 1998. MFS acquired UUNET Technologies shortly before merging with WorldCom.

WorldCom and MCI Communications announced a $ 37 billion joint venture to develop MCI WorldCom on November 4, 1997, the largest joint venture in US history. The merger was completed on September 15, 1998, resulting in the creation of MCI WorldCom. To gain approval from the US Department of Justice, MCI downgraded its "internet" sector.

Sprint Company and MCI WorldCom declared a $ 129 billion cooperative venture on Oct. 5, 1999. If the deal had been completed, it would have resulted in the merging of the world's two biggest corporations. The combined firm will be the biggest telecommunications company in the United States, surpassing AT&T. The deal, however, fell through due to objections from the US Department of Justice and the European Union over concerns that it would establish a monarchy. Both companies' boards of directors dissolved their joint venture on July 13, 2000. MCI WorldCom changed its name to "WorldCom" later that year.

Suffocate

Unfortunately for thousands of workers and shareholders, WorldCom has wrongly reported $ 3.8 billion in financial spending, which has boosted the rate of cash flows and earnings in all four quarters of 2001 and the first quarter of 2002. Since spending can be long-term deductions, and expenditures can be excluded from sales automatically, the company's real residual deficit in five rooms is hidden. WorldCom also redistributes prices by lowering the value of goods from discovered firms while raising the value of interest. Acquired firms take on accounts that have been ignored or slightly forgotten by the organization. WorldCom's financial position seems to be changing quarterly as a result of these accounting activities. As long as WorldCom continues to purchase new companies, accountants can change commodity prices and prices. Internal auditing revealed questionable accounting practises that date back to 1999. Investors, unaware of the alleged fraud, proceeded to buy the company's stock, raising the price to $ 64 per share. When unethical accounting practises were exposed, WorldCom was also in financial difficulties. Owing to a reduction in inflation and earnings, as well as a desire for revenue, the company was heavily in debt. The firm has taken advantage of the rising value of its stock to fund the purchase of other companies. The discovery of these companies, especially Miscommunications, drew investors to WorldCom stocks. WorldCom CEO Bernard Ebbers has also received a $ 408 million loan from the board of directors to fund low-level calls on loans secured by the company's portfolio. The Board has borrowed Ebbers money at a rate that is lower than the national average and lower than their expected return. WorldCom reached a lending deal with several banks in July 2001, agreeing to lend $ 2.65 billion and repay it within a year. WorldCom allegedly influenced the entire volume six weeks prior to the announcement of financial irregularities, according to banks. Banks say that if they understood the true state of WorldCom's finances, they would not raise the loan amount without finding additional collateral.

The Securities and Exchange Commission (SEC) directed WorldCom to report information that led to the circumstances outlined in the June 25 press release about the company's intention to replicate its 2001 financial statements and the first quarter of 2002. a record that has been led He clarified that CFO Scott Sullivan had prepared the 2001 and first quarter of 2002 financial statements. On February 6, 2002, the WorldCom Audit Committee and Arthur Andersen, the company's external auditor, met to review the review for the year stemmedDec. 31, 2001.

Arthur Andersen examined WorldCom's accounting practices to see whether they could be included. Adequate safeguards against financial statements material misrepresentation WorldCom's processes for additional line charges, capitalization of building property, and computer accounts were successful, according to Andersen. In response to particular committee questions, Andersen claimed that their auditors had never had a disagreement with management, and that this is also true for WorldCom's accounting functions. WorldCom agreed to break the General Accounting System (GAAP), which was revamped, between 1999 and 2002, and their salaries totaled $ 11 billion. Accounting fraud is estimated to be worth $1.5 billion, according to experts.

Common Size Bank Statements WorldCom

	1999	2000	2001
Revenue	100%	100%	100%
Line cost	41	39.6	41.9
Trade General Secretarial	24.9	27.1	31.4
Reductionand payback	12.1	12.5	16.7
Workingsalary	22	20.9	10
Interestcost	2.7	2.5	4.4
Sundry	0.7	1	1.2
Revenue before income taxes, minorityinterests, cumulativeimpactof officeshift	20.3	19.4	6.8
Requirement for paylevies	8.3	7.7	2.6
Revenue before smallerinterests and collective effect of secretarial change	11.7	11.7	4.2
Factionbenefits	0.5	0.8	0.1
Collective effect of shift	--	0.2	--
Net pay	11.2	10.6	4.3
Delivery on compulsorily redeemable chose securities and other preferred paymentneeds	0.2	0.2	0.3
Net revenue applicable to mutualstock holders	11%	10.5%	3.9%

 

WorldCom Statements in 10-K

In 2001, line costs as a percentage of sales rose to 41.9 percent, up from 39.6% in 2000. Line expenditures for the year 2000, except Embratel, totaled $ 13.8 billion, or 38.9% of revenues. The rise in sales is due to price demand for commercial data and aggressive prices as a dial-up Internet company, which resulted in a 17 percent decrease in access revenue per hour in 2001 compared to 2000. As previously said, sales rose due to reduced revenue from calling cards and higher margin telephone calls as a result of the wireless exchange.

Balance Sheets – Assets

	Dec 31,2000	Dec 31,2001
“Cash and cash equalness”	$761	$1416
”Account receivable net of allowance for bad debts of $1532 in 2000 and 1086 in 20001”	6815	5308
”Differedtax asset”	172	251
”Another current asse”t	2007	2230
”Total current assets”	9755	9205
”Transmission equipment’s”	20288	23814
”Communication equipment”	8100	7878
”Furniture, fixture and other”	9342	11263
”Construction in progress”	6897	5706
”Accumulative depreciation”	44627	48661
	(7204)	(9852)
	37423	38809
”Goodwill and other intangible assets”	46594	50537
”Other assets”	5131	5363
	$ 98,903	$ 103,914

 

 

	Dec 31,2000	Dec 31,2001
“Cash and cash equalness”	$761	$1416
”Account receivable net of allowance for bad debts of $1532 in 2000 and 1086 in 20001”	6815	5308
”Differedtax asset”	172	251
”Another current asse”t	2007	2230
”Total current assets”	9755	9205
”Transmission equipment’s”	20288	23814
”Communication equipment”	8100	7878
”Furniture, fixture and other”	9342	11263
”Construction in progress”	6897	5706
”Accumulative depreciation”	44627	48661
	(7204)	(9852)
	37423	38809
”Goodwill and other intangible assets”	46594	50537
”Other assets”	5131	5363
	$ 98,903	$ 103,914

 

Balance Sheets- Liabilities

YEAR.	SALES	NET REVENUE	CFO	RESOURCES	LIABILITIES
1997	7351	384	1318	22390	8880
1998	17678	-2687	4085	86401	37674
1999	37120	3950	11005	91072	37187
2000	39090	4089	7666	98903	40902
2001	35179	1384	7778	103914	43890

 

Financial Ratio of WorldCom: financial statements 2000 & 2001

A forensic accountant can detect the relationship between an entity's income statement and balance sheet by comparing the two financial statements. On the balance sheet, for example, if a transaction is reported on the income statement, assets will rise and liabilities will fall. Expenses have an effect on both the income statement and the balance sheet. When a cost is reported on the income statement, for example, assets will decrease and liabilities will increase on the balance sheet.

Finally, it's clear that an income statement audit admission would have an effect on the balance sheet for the accounting period. According to WorldCom's financial statements, the company's earnings decreased between the fiscal years 2000 and 2001, while liquidity increased. In addition, it seems that the return on investment has dropped dramatically.

Overall, the company's financial performance has deteriorated as a result of lower sales and higher costs, which is cause for concern. The spike in land, factory, and infrastructure prices, for example, leads to the conclusion that WorldCom may have under-reported expenditures elsewhere in the income statement. The corporation had to raise another account on the balance sheet to compensate for the under-reporting of these costs on the income statement.

WorldCom,Inc.
Balance-Sheet
As on December 31
Figures in millions
ASSETS	2000	2001
“Current assets”
“Cash and cash equivalents”	$761	$1,416
“Accounts receivable, net of allowance for bad debts of $1,532 in 2000 and $1,086 in 2001”	6,815	5,308
“Deferred tax asset”	172	251
“Other current assets”	2,007	2,230
“Total current assets”	9,755	9,205
“Property, plant and equipment, net”	37,423	38,809
“Goodwill and other in tangible assets”	46,594	50,537
Other assets”	5,131	5,363
	$98,903	$103,914
LIABILITIES AND SHAREHOLDERS'INVESTMENT
Current liabilities:
Short-term debt and currentmaturities of long-term debt	$7,200	$172
Accrued interest	446	618
Accounts payable and accruedline costs	6,022	4,844
Other current liabilities	4,005	3,576
Total current liabilities	17,673	9,210
Long-term liabilities, lesscurrent portion:
“Long-term debt”	17,696	30,038
“Deferred tax liability”	3,611	4,066
“Other liabilities”	1,124	576
“Total long-termliabilities”	22,431	34,680
“Minority interests”	2,592	101
“Company obligated mandatorilyredeemable and other preferred securities”	798	1,993
Shareholders' investment:
“WorldCom, Inc. common stock,par value $.01 per share; authorized: 5,000,000,000 shares in 2000and none in 2001; issued and outstanding: 2,887,960,378 shares in2000 and none in 2001”	29	0
“WorldCom group common stock,par value $.01 per share; authorized: none in 2000 and4,850,000,000 shares in 2001; issued and outstanding : none in 2000and 2,967,436,680 shares in 2001”	0	30
“MCI group common stock, parvalue $.01 per share; authorized: none in 2000 and 150,000,000shares in 2001; issued and outstanding: none in 2000 and118,595,711 in 2001”	0	1
“Additional paid-incapital”	52,877	54,297
“Retained earnings”	3,160	4,400
“Unrealized holding gain (loss)on marketable equity securities”	345	-51
“Cumulative foreign currency translation adjustment”	-817	-562
“Treasury stock, at cost,6,765,316 shares of WorldCom, Inc. in 2000, 6,765,316 shares of”	-185	-185
Total share holders' Investment	55,409	57,930

 

Reasons behind Debacle

While the company's biggest telephone company, WorldCom, collapsed and was absorbed, the U.S. He saw one of history's most egregious accounting frauds. On July 13, 2005, former CEO Bernie Ebbers, 63, was found guilty of conspiracy to defraud the US $ 11 billion accountant and sentenced to 25 years in prison. What happened to the audits and ratings? They aren't paying attention? What happened to WorldCom's board of directors, the company's once-powerful executives, in particular? Are they "drowning in the swamp"?

I came across an informative article titled "Report of Investigation" dated March 31, 2003 while investigating these big flaws in corporate governance and what could be done to stop them. The Report is the source of the majority of my analysis, and all of the quotes below may be explicitly linked to it. WorldCom publishes major financial statements that hide the company's deteriorating financial situation. The following is how the financial shenanigans were listed in the report: "... While fraud was widespread, it was carried out in an unusual manner: fraudulent or unsupported financial statements totaling more than $ 9 billion were sent to WorldCom's financial systems in order to receive the recorded financial results. Bernie Ebbers, the CEO of WorldCom, was the driving force behind the scam. Ebbers were specifically focused on generating incredible acquisition success in the 1990s. How will he cover the cost of his adoption inebriation, using WorldCom stock as an example. The stock had to continue to rise in value in order to reach this purchase price. Here's a quick rundown of the situation as described in the Report:

WorldCom has been keeping a close eye on a growing range of acquisitions. The plan culminated in the 1998 purchase of WorldCom by MCI Communications, a corporation with more than twice as much turnover as WorldCom. Due to claims of dishonesty, the planned merger with Sprint has been cancelled... "

Ebbers recognize the importance of showing sales and revenue. Financial strains were the only way to achieve this goal. The dilemma is that working with this method of cheating makes it much more difficult to implement. Fraud does not remain constant over time. The downturn in the telecommunications industry has made Ebbers' situation worse. “Wall Street has predicted a double-digit growth rate for WorldCom at this point”. After all, they've accomplished so much in such a short time. On the other hand, WorldCom needed time for its executives to maintain their newly acquired companies, understand how to use them, and act responsibly. Ebbers lacked the courage to inform Wall Street that WorldCom needed more time to consolidate and digest its acquisitions. To satisfy Wall Street's needs, Ebbers had to consult his company's medical records. If he had the courage to tell them what they truly wanted, WorldCom would still be alive today, and Ebbers would not have lived the remainder of his life in prison. Eber's apparent need to expand and retain his financial status was also a major part of the con. As a result, he had to demonstrate a consistent rise in money in order to avoid low-level calls in his WorldCom warehouse, which he had agreed in exchange for a loan.

In 1983, he was one of the company's founders. He became the company's chief operating officer in 1985. He held the position until April 2002, when he resigned. There was his financial dilemma, which may have influenced the accounting of the accounting case under his supervision. When he retired, he owed over $400 million on a debt secured by his WorldCom shares. (US Telecommunications Company) WorldCom claims to be hiding $ 3.8 billion in costs; US History's Largest Writings

Scott Sullivan was WorldCom's interim chief financial officer and secretary. In June 2002, he was also sacked for blatantly listing the incorrect accounting. Bernard Ebbers considered him a close associate. (Telecommunications Company of the United States of America) WorldCom claims to have discovered $ 3.8 billion in hidden funds, making history in the United States.

Former WorldCom executive director and vice president David Myers in the same day as Sullivan's firing in June 2002, he resigned on grounds of irregular accounting. (WorldCom, a US telecommunications company, hides $3.8 billion in the largest writing in US history.)

Former WorldCom financial officer Buford "Buddy" Yates For his part in the crime, he was convicted and sentenced to one year and one day in jail.

Betty Vinson is a former chief financial officer of WorldCom corporations. For his part in the fiasco, he was sentenced to five months in jail.

Jack Grub man – At the time of the controversy, he was a Wall Street commentator. He had close ties with key members of many of the biggest organizations, and he gave financial guidance to clients through them. He encouraged people to purchase WorldCom stock as well as sell it. He claims he was completely unaware of the controversy before it became official. He has been barred from working in the defense industry for the rest of his life and has been fined $ 15 million. He couldn't be charged with malicious mischief as a crime.

How to Stay Out of Bankruptcy

It is certain that the Board of Directors who were present when WorldCom planted the seeds of its demise should have intervened to prevent the financial crisis.

While the Report explicitly blamed the Ebbers for the fact that "... Fraud was the product of the way WorldCom CEO, Bernard J. Ebbers, handled the Company... was a source of culture, and a lot of strain, which caused this fraud," the Board of Directors undoubtedly shares responsibility for the event. "... The situation in which it occurred was characterized by a significant lack of corporate governance...", according to the Study.

Following the public announcement on June 25, 2002, new steps were taken right away to transform WorldCom and regain public confidence in the business. This is the first significant one. The transition was the replacement of senior management. Ebbers quit early this year, Sullivan was fired, and Myers resigned, all thanks to a big loan he had taken from the company. There is a new administration in the White House. The new COO, CFO, general counsel, and internal director management have no previous affiliation with WorldCom. The Board of Directors was restructured from the ground up. A modern Board of Directors that guarantees transparency while still scrutinizing management decisions. The treasury and finance department in Clinton, Mississippi, where bribery was discovered, was shut down (Breeden, 2003). As a result, all suggestion of wrongdoing in the business has been removed.

Although more than 400 new financial and accounting staff were hired, 17,000 of WorldCom's 85,000 former employees were laid off. A new forensic auditor was present when the false financial statements were sent for inspection. Excessive products were inspected for flaws, and positive registrations from prior purchases were noted. Stock options were then phased out, and the stock was limited to the full payout value of share capital acquisitions (Breeden, 2003). The stock price, which peaked at $ 64.50 in 1999, plummeted to $ 0.83 on July 21, 2002, when the company filed for Chapter 11 bankruptcy protection. Internal safeguards have been strengthened as a result of a comprehensive review. Finally, through executive training systems, a new code of ethics was implemented to remind workers on their obligations to the corporation as well as accounting problems that may suggest anomalies (Breeden, 2003). Although WorldCom's latest introduction of the controls demonstrates its commitment to renewal, these reforms were, sadly, just what WorldCom needed to prevent fraud from the start. Anything may have been found if the corporate audit department had been given the freedom to do its job properly after the takeover. In the meantime, Cooper. The organization has provided the Board with a slew of machine failures, none of which have been prioritized, due to a lack of interest within the service.

Lessons

      What do we infer from the reasons for WorldCom's deception?

      It was predicted that WorldCom's internal climate would change. I believe that even if there had been no bribery, the business would have failed earlier than it has.

      Really, he did. The manipulation worked like a gum line clearing a dam hole. It was a storm outside that forced the gums to loosen their hold. Finally, an investigation deficiency was the lack of qualified personnel for the discovery and reconstruction of the pit.

      WorldCom's organizational issues also included a lack of a viable internal policy and poor controls, a hostile culture requiring high returns, and a refusal to do what was best for the company's equity owner and stock manager.

      While the company's success is vital to its stability, the company must still focus on the long-term rather than the next quarter's study. The business emphasises that by doing so, it creates value for both Wall Street and its customers, who are the company's main drivers.

      Employees are also responsible for the company's development and performance. WorldCom's competitive culture, on the other hand, was seen as being obedient to management in terms of behavior, fairness, and dignity ("doing what is right").

      The Board of Directors has operated like a self-contained internal regulation that has collapsed.

      The Board's job was to fix the company's flaws that the management couldn't perceive because of the company's lack of independence. The Board, on the other hand, seems to be unwilling to stand on its own, since the majority of its members are Ebbers' mates. As a result of our relationship, I've learned a lot.

      Rather than doing its job of protecting the shareholders, the board kept searching for a more agreeable management.

      The Audit Committee, which was part of the Board, was in charge of communicating with the internal and external auditors. It was absolutely inactive contacting one of the auditors for just three or six hours a year. Despite the fact that Arthur Andersen told the Committee that WorldCom had abused GAAP, committee members decided to disregard this information.

      To the already weakened home, the exterior atmosphere was a hurricane. 'The'

      The company's stock price has dropped even further after the Internet and telecom bubbles burst. This drop is countered by Jack Grub man’s continued "buy" recommendations.

      WorldCom is a company based in the United States.

      Finally, we can see where the business seems to be based on the things we've learned from these causes.

      It works better in an open setting, and the internal auditor is in charge of conducting the search. Furthermore, an external auditor should join on purpose, with an objective mind set, and assess an organization with transparency, fairness, and freedom.

      When setting a target in an organization, one must organize, design, execute, and evaluate. The data gathered during the analysis process shows that there is a presence.

      The most valuable rules, which include a comprehensive structure for usage and maintenance I Organization, are available. Unfortunately, while businesses fail to prepare and design a community of strong work ethic, which, for example, already appears in these rules, companies fail to enforce it.