Once cited as an industry leader in the telecommunication industry, WorldCom is now known for one of the biggest corporate scandals witnessed in the United States that eventually resulted in the bankruptcy of the company in 2002. Post the bankruptcy filing of the company, 30,000 individuals lost their jobs and thousands of investors lost a total of $180 billion as well as trust in the functioning of financial markets.(Worldcom)
The event of accounting fraud unfolded when the team of internal auditors in the company uncovered fake accounting entries worth $3.2 billion. Later it was found that the top executives of the company were aggressively involved in structuring the wrongdoing and CEO, Bernard Ebbers was the mastermind.
Thereafter, in March, 2002, SEC declared an official inquiry for scrutinizing the accounting books of the company and later SEC confirmed that fraudulent transactions were used by the company to inflate their assets by $12 billion. The main accounting treatment followed by the company was the capitalizing of the line cost instead of expensing it and creating phony entries to support the transaction. Finally, the company filed for bankruptcy on 25th June, 2002 and the stock price plunged to 21 cents in after-hours trading.(Worldcom)
(Worldcom Stock Price)
Federal Court also found CEO Bernard Ebbers guilty and he was sentenced to 25 years in imprisonment while CFO, Scott Sullivan received a 5-year imprisonment. Later, the company was reorganized as MCI Corporation and paid $750 million to SEC in cash and in stock in the new company. Most importantly, after the Worldcom scandal, US Congress, with the intention to restore the investor confidence, amended the Companies Act, 1930 and passed Sarbanes-Oxley Act in July, 2002. (Worldcom)
References
Worldcom. (n.d.). Retrieved March 13, 2016, from Investopedia: http://www.investopedia.com/terms/w/worldcom.asp
Worldcom Stock Price. (n.d.). March 13, 2016, from http://agonist.org/Learning-Center/invest/worldcomstockprice.html
