Case Study: WorldCom
In addition, they were the second-largest long distance carrier in 1 998 and 2002. How the Fraud Happened So what happened? In 1999, revenue growth slowed and the stock price began falling. World’s expenses as a percentage of its total revenue increased because the growth rate of its earnings dropped. This also meant World’s earnings might not meet Wall Street analysts’ expectations. In an effort to Increase revenue, World reduced the amount of money It held In reserve (to cover liableness for the impasse It had acquired) by $2.
Billion and moved this money Into the revenue line of Its financial statements. That wasn’t enough to boost the earnings that Beers wanted. In 2000, World began classifying operating expenses as long-term capital investments. Hiding these expenses in this way gave them another $3. 85 billion.
These newly classified assets were expenses that World paid to lease phone network lines from other companies to access their networks. They also added Journal entry for $500 million in computer expenses, but supporting documents for the expenses were never found.
These changes turned World’s losses into profits to the tune of $1. 38 billion in 2001. It also made World’s assets appear more valuable. How it Was Discovered After tips were sent to the Internal audit team and accounting irregularities were spotted In Mi’s books, the SEC requested that World provide more Information.
The SEC was suspicious because while World was making so much profit, AT another telecoms giant) was losing money.
An internal audit turned up the billions World had announced as capital expenditures as well as the $500 million in undocumented computer expenses. There was also another $2 billion in questionable entries. World’s audit committee was asked for documents supporting capital expenditures, but it could not produce them. The controller admitted to the internal auditors that they weren’t following accounting standards. World then admitted to inflating its profits by $3.
Billion over the previous five quarters.
A little over a month after the internal audit began, World filed for bankruptcy. Where Are They Now? When It emerged from bankruptcy In 2004, World was renamed MIMIC. Former CEO Bernie Beers and former SCOFF Scott Sullivan were charged with fraud and violating securities laws. Beers was found guilty on all counts In March 2005 and sentenced to 25 years in prison, but is free on appeal.
Sullivan pleaded guilty and took the stand gallant toners In exchange Tort a more element sentence AT Twelve years.