Worldcom

Accounting Fraud at WorldCom

Introduction

WorldCom, now known as MCI Inc., was founded in 1983 as LDDS (Long Distance Discount Service). The telecommunications company experienced rapid growth in the 1990s primarily due to several large acquisitions. The company became WorldCom Inc. in 1995 following the purchase of Williams Telecommunications Group Inc. for $2.5 billion. In 1998, WorldCom completed its largest corporate merger to date, purchasing MCI Communications Inc. for $40 billion. Also in 1998 were the mergers with Brooks Fiber Properties Inc. and CompuServe Corp. WorldCom and Sprint Corp. agreed to merge in 1999. However, in 2002 the merge was blocked by regulators in both the U.S. and Europe out of fears the company was becoming too large (FOX News Network, 2005). The company’s growth-through acquisition strategy was stunted by this but the 65 acquisitions that had already taken place made the company very competitive. Besides, WorldCom executives realized that large scale mergers were no longer a viable means of expanding the business. At the height of the company’s success, WorldCom’s stock was trading above $64 per share. Yet, the company’s steady growth and profits came to a halt when fraudulent financial reporting was eventually uncovered.

Substantive Issues Raised

The failed merger signified the beginning of the end for WorldCom. As long-distance rates and revenue declined the accumulation of debt has placed a strain on the financial health of the company, threatening WorldCom’s ability to meet key-performance indicators and earnings projections. Analysts and observers within the Telecom industry typically focus on the line cost expenditure-to-revenue (E/R) ratio as a critical performance indicator. WorldCom management touted a lower E/R ratio (42 percent) than their competitors and consistently struggled to maintain that level during the fraud years. To meet analysts’ expectations, management manipulated financial information to increase the...