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WorldCom: The Final Catalyst
WorldCom Lights the Fire
WorldCom, Inc., the second largest U.S. telecommunications giant and almost 70 percent larger than Enron in assets,
announced on June 25, 2002, that it had overstated its cash flow by $3.8 billion.1 This came as a staggering blow to the
credibility of capital markets. It occurred in the middle of the furor caused by:
• The Enron bankruptcy on December 2, 2001, and the related Congress and Senate hearings and Fifth Amendment
testimony by Enron executives
• The depression of the stock markets
• The pleas by business leaders and President Bush for restoration of credibility and trust to corporate governance,
reporting, and the financial markets
• Responsive introduction of governance guidelines by stock exchanges and the Securities and Exchange Commission
• Debate by the U.S. Congress and Senate of separate bills to improve governance and accountability
• The conviction of Arthur Andersen, auditor of both Enron and WorldCom, for obstruction of justice on June 15, 2002
WorldCom’s Accounting Manipulations
WorldCom’s accounting manipulations involved very basic, easytospot
types of fraud.2Overstatements of cash flow and
income were created because one of WorldCom’s major expenses, line costs, or “fees paid to third party
telecommunication network providers for the right to access the third parties networks,”3 were accounted for improperly.
Essentially, line costs that should have been expensed, thus lowering reporting income, were offset by capital transfers or
charged against capital accounts, thus placing their impact on the balance sheet rather than the income statement. In
addition, WorldCom created excess reserves or provisions for future expenses, which they later released or reduced,
thereby adding to profits. The manipulation of profit through reserves or provisions is known as “cookie jar” accounting.
The aggregate overstatement of income quickly rose to more than $9 billion4 by September 19, 2002, for the following
reasons:
• $3.85 billion for improperly capitalized expenses, announced June 25, 20025
• $3.83 billion for more improperly capitalized expenses in 1999, 2000, 2001, and the first quarter of 2002, announced on
August 8, 20026
• $2.0 billion for manipulations of profit through previously established reserves, dating back to 1999
Ultimately, the WorldCom fraud totaled $11 billion.
Key senior personnel involved in the manipulations at WorldCom included:
• Bernard J. Ebbers, CEO
