On This Day In Finance: July 21 - WorldCom Files For Bankruptcy

By Joseph Nguyen | July 21, 2009 AAA
On This Day In Finance: July 21 - WorldCom Files For Bankruptcy

On July 21, 2002, WorldCom filed for bankruptcy protection in one of the largest bankruptcies in United States history. In a year when the U.S. saw a disturbing number of accounting scandals such as Enron and Tyco, WorldCom took the scale of corporate scandals to the next level. WorldCom attempted cover up deteriorating profitability and growth in its business by fraudulently inflating revenue and underreporting costs in financial statements. As of July 21, 2009, WorldCom's bankruptcy ranked as the second largest in U.S. history with assets at the time of $104 billion. The largest bankruptcy ever was Lehman Brothers in 2008, when it filed for bankruptcy with assets of about $639 billion.

One of the people credited with uncovering this massive accounting scandal was Cynthia Cooper, who worked as an internal auditor at WorldCom. Her suspicions began to grow when she noticed several peculiar accounting transactions in the company's books. Working in secrecy, she scoured the company's accounting information system and discovered nearly $4 billion of misallocated expenses and falsified accounting entries that were designed to make the company look more profitable. She took the evidence to the board's audit committee and they terminated Scott Sullivan, Worldcom's CFO, along with two others. (Read An Inside Look At Internal Auditors to learn more about these, and more, unsung heroes.)

One of the unique differences between WorldCom and the other accounting scandals during the period was that many people who met Bernard Ebbers, WorldCom's CEO, found him to be a very likable guy. Ebbers, born a Canadian, was very active in his community. He donated money to colleges, taught sunday school, and used to coach basketball. Unlike other senior executives in other corporate scandals, Ebbers held on to his stock to the very end, leaving him broke and in debt a couple hundred million dollars. Ebbers actually thought the company could turn it around.

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