Company Background

 WorldCom was a provider of long distance phone

services to businesses and residents. It started as
a small company known as Long Distance
Discount Services (“LDDS”)during 1983 based in
Jackson, Mississippi.

 1985 – Bernie Ebbers was selected by LDDS

(board) to be the Chief Executive Officer (CEO)

 1989 – the company became publicly traded as a

corporation as a result of a merger with
Advantage Companies, Inc.
 1995 – Company name changed to LDDS
WorldCom, relocated to Clinton, Mississippi.

 The company acquires over half a dozen

communication companies during the year
1988- 1994.

 November 1997, WorldCom and Microwave

Communication Inc. (MCI) merged for US$37
billion and became MCI WorldCom, making it
the largest corporate merger in US history.
 To provide services to customers, WorldCom had
to pay other companies to use their cables and
towers.

 Line Costs (expense) were disguised as assets

under ‘Prepaid expenses and other current
assets’ account.

 June 22, 2002, WorldCom announced that it had

overstated net profit by $3.8BILLION in 2001 and
early 2002 because $3.8Billion of line cost had
been treated as an asset instead of expense.
 INCORRECT
CORRECT
(What WorldCom Did)

ASSETS=LIABILITIES+EQUIT ASSETS=LIABILITIES+EQUITY
Y $100 = $70 + $30
$100 = $70 + $30
↓ Cash
($3.8)

↑Line
↓Capital
Cost
($3.8)
($3.8)

$100 = $70 + $30 $96.20 = $70 + $66.20

Overstated No Overstated
by $3.8 Effect by $3.8
 There are more losses incurred than gain.
 Had a bachelor’s degree in physical education, minor
in secondary education at Mississippi College (1967)

 He is one of the firm’s founders in 1983.

 WorldCom CEO, 1985.

 While CEO of WorldCom, he was a member of the

Easthaven Baptist Church in Brookhaven, Mississippi.
As a high-profile member of the congregation,
Ebbers regularly taught Sunday School and attended
the morning worship service with his family. His faith
was overt, and he often started corporate meetings
with prayer. When the allegations of conspiracy and
fraud were first brought to light in 2002, Ebbers
addressed the congregation and insisted on his
innocence.

 Resigned in April 29, 2002 at WorldCom.

 He had an excess of $400 million dollars in personal

loans using his WorldCom stock as collateral at the
time of his resignation.

 He received a 25-year sentence, the maximum

sentence since he did not accepted the plea
agreement and was found guilty.
 He is an American Certified Public Accountant and
the former chief financial officer, secretary, treasurer,
and a board member of WorldCom, who was
convicted as part of WorldCom's $3.8 billion
accounting fraud.

 Sullivan was CFO, treasurer and secretary of

WorldCom from December 1994 to December 2002,
and was its executive vice president from April 2002.

 During this time, he put on ostentatious displays of

wealth, including building a 24,000sq.ft. mansion
in Boca Raton, Florida.

 In 2002, Sullivan was asked to resign by the

company's board of directors; he refused, and was
fired.

 In August of that year, Sullivan was arrested

and charged with seven counts related to fraud at
WorldCom.

 Sullivan entered a guilty plea and was sentenced to

five years in prison as part of a plea agreement in
which Sullivan testified against former
WorldCom CEO Bernard Ebbers.

 Sullivan was released from jail in August 2009, after

serving four years of his sentence. He was required
to be on home confinement for another three years.
He returned to Boca Raton, but not to his mansion,
which had been sold.
 He was the controller and
senior vice president of
WorldCom.

 He resigned in June 2002,

the same day as the firing
of Sullivan, because of his
alleged involvement in the
improper accounting.

 He was sentenced to 1 year

and 1 day in prison for his
role in the scandal.
 He was the former
director of accounting
at WorldCom.

 He was charged and

sentenced to 1 year
and 1 day in prison for
his role in the scandal.
 She was the former
director of corporate
accounting at
WorldCom.

 She was sentenced to

five months in prison
for her role in the
scandal.
 He was a former
accountant for
WorldCom.

 He was sentenced
to 3 years
probation for his
role in the scandal
 Kenneth M. Avery and
Melvin Dick were the
primary auditors
representing their firm in
the WorldCom scandal.

 They were accused of not

exercising due care and
skepticism in their 2001
audits of the company.

 Dick was barred from

practicing accounting for 4
years and Avery was barred
for 3 years.
 He was an analyst on Wall Street at the
time of the scandal.

 He had a very intimate relationship with

key members of many top organizations
that he was giving financial advice about
to customers.

 He urged people to buy WorldCom

securities and then urged them sell.

 He maintains that he was unaware of the

scandal until it was made publicly
known.

 He has been banned for life from the

securities business and ordered to pay a
$15 million fine.

 He was not being charged criminally.

 He was vice chairman of the
board until 2002 when
Ebbers resigned.
 He then became
WorldCom’s new CEO.
 He was never charged in the
accounting scandal and
maintains that he was not
involved in the finances of
the company in many
years.
 He did publicly apologize
on behalf of WorldCom for
its behavior and vowed to
see that those involved are
punished.
 Chief Internal Auditor of
WorldCom.
 She brought the accounting
discrepancies that she and her
team found to the attention of
Sullivan, Arthur Anderson LLP,
Myers and many more throughout
the company.
 She was told to ignore the issue.
 She conducted her own audit of
the company in comparison to the
Arthur Anderson audit.
 With the help of her team, she
“blew the whistle” on the scandal
at WorldCom to their audit
committee in Washington D.C.
 In early 2002, a group of internal auditors
discovered a $500 million charge for computer
equipment that had no invoices or
documentation to back up the charge.

 By March 2002, the SEC was getting suspicious of

WorldCom’s financial reports.

 On March 7th 2002, the same day that an internal

auditor would receive a threat from Ebbers to
halt her investigation into WorldCom’s books, the
SEC would surprise the company with a request
for more information on their business.
 WorldCom declared bankruptcy July 21st,
2002 with $107 billion in assets.

 Congress passed the Sarbanes-Oxley Act of

2002 after multiple accounting scandals,