What is 'WorldCom'

Formerly known as WorldCom, now known as MCI, this U.S.-based telecommunications company was the second-largest long-distance phone company in the country until a massive accounting scandal that led to the company filing for bankruptcy protection in 2002. Most notably, company founder and former CEO Bernard Ebbers was sentenced to 25 years in prison, and former CFO Scott Sullivan received a five-year jail sentence, which would have been longer had he not pleaded guilty and testified against Ebbers. Under the bankruptcy reorganization agreement, the company paid $750 million to the Securities and Exchange Commission (SEC) in cash and stock in the new MCI, which was intended to be paid to former investors.

BREAKING DOWN 'WorldCom'

In July 2002, WorldCom filed for Chapter 11 bankruptcy protection in the Southern District of New York. Approximately one-month prior, an internal audit showed the company improperly accounted for $3.8 billion in operating expenses over five quarters. After filing for bankruptcy, Sullivan was fired, senior vice president and controller David Meyers resigned, and 17,000 workers were laid off. WorldCom's filing for bankruptcy, which did not include its foreign units, is, as of 2016, the biggest in U.S. history.

WorldCom’s Revenue Begins Decreasing

In late 1999, WorldCom’s revenue started decreasing when companies cut spending on telecommunications services and equipment. CEO Ebbers resigned in April due to $366 million in personal loans he had taken from the company.

Arthur Andersen Audits WorldCom

Arthur Andereon, the accounting firm responsible for auditing Enron Corp. before it collapsed due to financial mismanagement, audited WorldCom’s 2001 financial statements and reviewed its books for the first quarter of 2002. WorldCom’s accounting irregularities, including transfers between internal accounts of $3.06 billion in 2001 and $797 million in the first quarter of 2002, did not conform to generally accepted accounting principles (GAAP). Andersen maintained that WorldCom’s CFO did not inform the firm about the line cost transfers or discuss the accounting treatment. A new accounting firm, KPMG LLP, later conducted a comprehensive audit of WorldCom’s financial statements for 2001 and 2002.

WorldCom Files for Bankruptcy

When filing under Chapter 11, a company may continue operating while creating a reorganization plan. The week before the filing, WorldCom lined up $2 billion in debtor-in-possession financing from Citigroup, J.P. Morgan and G.E. Capital, allowing company operations to continue while it was in bankruptcy. WorldCom intended to use the money for covering obligations such as new services and employee wages.

WorldCom elected Nicholas Katzenbach, a former U.S. attorney general and former general counsel of IBM Corp., and Dennis R. Beresford, professor of accounting at the University of Georgia and a former chairman of the Financial Accounting Standards Board, to its board of directors. The two served on a special investigative panel for improving WorldCom’s accounting practices.

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