Manipulation of Mci Ar Case

Manipulation of MCI’s Allowance for Doubtful Accounts

Walt Pavlo joined MCI in the spring of1992. At that time, MCI was a growth company in the booming

long-distance telecommunications industry that had 15 percent of the long- distance market, with

revenues of$11 billion.

In the 1990s the major telecommunications companies all shared their fiber-optic networks. This was

more efficient than having each company lay its own network to every corner of the country. Each

company would use the others’ networks in places where the former did not have cable and vice versa.

The cost of routing a call through these fiber optic networks was measured in pennies per minute.

However, MCI and the other telecommunication companies sold the right to use the network to their

customers for dimes per minute. It was a lucrative business based on volume. The more the network

was used, the greater the revenue for the telecommunication company. MCI’s stellar revenue growth

was due to its sales, and sales personnel were awarded lucrative commissions. Senior management was

given generous stock options. It was heady times.

MCI had a wide array of clients that varied from major corporations, such as American Express, General

Electric, and IBM, to small newly formed long-distance discount services. Called LDDS, these were

primarily marketing firms that bought MCI long-distance capacity, which they resold to individuals and

small businesses. Although these LDDS customers represented only 5 percent of MCI’s annual sales, the

profit margins for both MCI and the LDDS companies were quite substantial. For example, in 1992,

Telephone Publishing Corp., or TCP, paid $600,000 to MCI for long-distance calls that TCP was charging

its customers approximately $5 million per month. After paying its overhead, TCP was netting, before

taxes, about $20 million per year. Meanwhile MCI was often charging a LDDS as much as 28 cents a

minute for services that cost about 5 cents. Everyone was making...