Business, Legal & Accounting Glossary
The WorldCom Scandal was an accounting scandal involving the telecommunications company WorldCom, which was at the time the second-largest long-distance phone company in the USA (2002).
As the scandal surfaced, it emerged that WorldCom had dishonestly enhanced it’s financial results by approximately $11 billion USD through (i) falsely classifying various operating expenses as capital expenditure, and (ii) improperly manipulating it’s revenue reserves.
The former meant that many current expenses failed to be displayed on the profit and loss account, thereby appearing to inflate the companies short-term profits; whilst also artificially boosting the value of the assets.
The latter likewise created illusory profits whilst diminishing liabilities.
The fraud identified by internal auditors at WorldCom was at the time the biggest scandal in US history – and led to the company subsequently filing for bankruptcy protection in 2002.
As a result of the scandal, several senior executives at WorldCom also faced criminal charges.
For a time, WorldCom (WCOM) was the United States’ second-largest long-distance phone company (AT&T is the largest). WorldCom grew largely by acquiring other telecommunications companies, most notably MCI. It also owned the Tier 1 ISP UUNET, a major part of the Internet backbone. It was based in Clinton, Mississippi.
In June 2002, an internal audit discovered that US$3.8 billion had been ‘mis-accounted.’ The US Securities and Exchange Commission launched an investigation into these matters on June 26, 2002. (See accounting scandals.)
On July 21 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in United States history. Its CEO and founder, Bernard Ebbers, came under fire for his failure to prevent the bankruptcy.
In May 2003, the company was given a no-bid contract by the United States Department of Defense to build a cellular telephone network in Iraq. The deal has been criticized by competitors and others who cite the company’s lack of experience in the area.  (http://seattlepi.nwsource.com/business/123016_worldcomiraq22.html)
The company emerged from Chapter 11 bankruptcy in 2004 with a new name, MCI, and about $5.7 billion in debt and $6 billion in cash. About half of the cash was intended to pay various claims and settlements. Previous bondholders ended up being paid 35.7 cents on the dollar, in bonds and stock in the new MCI company. The previous stockholders’ stock was valueless.
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This glossary post was last updated: 20th February, 2020