The problem facing WorldCom's management was a decline in revenues
resulting from a decline in demand for telecommunications services,
particularly the company's long-distance services. The Internet
bubble was beginning to burst by mid-2000, hitting telecom companies
hard. The industry was faced with excess capacity that is still being
absorbed today as a result of overly exuberant investment in
infrastructure. The company's revenues were decreasing at the same
time its expenses were increasing.
"Bernard J. Ebbers, WorldCom" BusinessWeek (January 8, 2001)
http://www.businessweek.com/archives/2001/b3714068.arc.htm
The accounting problems reportedly began when, in the third quarter of
2000, reserve accounts were improperly depleted by $133 million to
boost revenues. The reduction in reserve accounts were used to create
fake sales and profits, allowing WorldCom to avoid issuing a warning
like Sprint did to announce a revenue and profit shortfall. As part
of the accounting manipulations in the third quarter of 2000, 21
accounting items were adjusted to increase revenue. The decreases in
reserves were unjustified, making the reductions fraudulent.
"WorldCom's 'Hit List' Accounting" By Lauren Gard, BusinessWeek
(February 9, 2005) http://www.businessweek.com/bwdaily/dnflash/feb2005/nf2005029_5503_db017.htm
The company continued to create fraudulent accounting statements by
treating normal operating expenses as capital investments. By doing
this, the company could gradually subtract the expenses from revenues
over time instead of having to subtract their full amount as they were
incurred.
"WorldCon " by Daniel Kadlec, Time (July 8, 2002)
http://www.time.com/time/archive/preview/0,10987,1002807,00.html
"In public reports the company had categorized billions of dollars as
capital expenditures in 2001, meaning the costs could be stretched out
over a number of years into the future. But in fact the expenditures
were for regular fees WorldCom paid to local telephone companies to
complete calls and therefore were not capital outlays but operating
costs, which should be expensed in full each year. It was as if an
ordinary person had paid his phone bills but written down the payments
as if he were building a phone tower in his backyard. The trick
allowed WorldCom to turn a $662 million loss into a $2.4 billion
profit in 2001."
"The Night Detective"
By Amanda Ripley, Time (December 30, 2002)
http://www.time.com/time/archive/preview/0,10987,1003990,00.html
A significant management failure was allowing the CEO, Bernard Ebbers,
to borrow $415 million from the company with his holdings in the
company as collateral. This placed enormous pressure on Mr. Ebbers to
keep the company's stock price high at all costs.
"WorldCom: the Rot Keeps Spreading" edited by Monica Roman,
BusinessWeek (November 18, 2002)
http://www.businessweek.com/@@gaIDZYUQigVhDg0A/magazine/content/02_46/c3808070.htm
"Since these were primarily fixed obligations, WorldCom was saddled
with the costs regardless of its revenue or the volume of its network
traffic. Naturally, the ratio of these line costs to total revenues
began to increase. Ebbers and Sullivan had repeatedly emphasized to
analysts that the synergies from WorldCom's acquisitions enabled it to
keep down line costs, as well as other expenses and had touted a ratio
of line cost expense to revenues of only 42 percent, while that of
AT&T and Sprint were above 50 percent."
"WorldCom ?A Case Study" by Mr. Kenneth Cochran
http://www.utdallas.edu/~billdent/6334--WorldCom%20Case%20Study.htm
The unusual ratio of line cost expense to revenues, which persisted
even as the company had boosted its investments and as revenues
declined, was the evidence that something was wrong with the company's
financial statements.
The WorldCom case study reference provided above provides additional
financial details regarding the fraud and the company's history that
you may find useful.
Sincerely,
Wonko |
