Meltdown of worldcom

1. International Finance
Executive Development Program
05 Oct 2014
Deveena Balasundaram
Nadeeshan Waduge
Abdul Rahim Rumi

2.  Introduction
 The Rise and Fall of WorldCom
 What Went Wrong and How?
 Recommendations
 Conclusion

3.  The last couple of decades saw the fall of many
organizations
• Eg: Enron, Parmalat, Adelphia Communications Corp and
Global Crossing Ltd
 Main Reasons for their fall:
• Recessions
• Accounting Fraud
• Criminal Activities
• Corruption
• Mismanagement of Assets and Operations
 Some Companies ended up bankrupt while
some were able to recover and continue
operations

4.  Established in 1983 by Murray Waldron and William
Rector.
 First named Long-Distance Discount Service (LDDS).
The company provided long distance telephone calls
at a discount.
 Investor Bernard Ebbers joined the company and
was appointed as CEO.
 Ebbers strategy was to grow through Mergers and
Acquisitions and was involved in close to 64 mergers
and acquisitions over the years
 Was the second largest telecommunication provider
in the US and largest Internet Provider

5.  The company grew mainly through its M&A strategies
 The company's first acquisition was Advantage Companies in
1989 through which the company went public
 Other Major Mergers and Acquisitions
• 1992
 Acquired Advanced Telecommunications Corp
 USD 850 Mn (Stock to Stock)
• 1993
 Acquired Resurgens Communications Group Inc and
Metromedia Communications Corp
 Long Distance Service Providers
 USD 1.25 Bn (Stock to Stock and Cash)

6.  Other Major Mergers and Acquisitions (cont’d)
• 1994
 Acquired IDB Communications Group
 Domestic and International Network Provider including data
connections, TV, Radio and Mobile Satellite Communication
capabilities
 USD 936 Mn (Stock to Stock)
• 1995
 Acquired Williams Telecommunications Group
 Voice and Data Transmission Company
 USD 2.5 Bn (Cash)
 Changed name to WorldCom
• 1996
 Mergers with MFS Communications Company and UUNet
Technologies
 MFS was into communication for business and governments in US and
Europe. UUNet was a internet service provider
 USD 12 Bn (Stock to Stock)

7.  Other Major Mergers and Acquisitions
(cont’d)
• 1998
 Merged with MCI
 Long distance service provider
 USD 40 Bn (Stock and Cash)
 The largest deal at that time and led to increase in
shareholder value and exceptional customer service
 Merged with Brooks Fiber Properties
 USD 1.2 billion
 Merged with CompuServe
 Internet provider for business and personal use
 USD1.3 billion

8.  Other Major Mergers and Acquisitions
(cont’d)
• 1999
 In talks with Sprint for a merger
 Estimated value USD 129 Bn
 Share Price reached a high of USD 65. 00 per share
 Merger was blocked by the US Department of Justice
and European Regulators fearing the violation of
Celler-Kefauver Antimerger Act
 Both parties decided to terminate their merger
agreement
• 2001
 Merged with Intermedia
 Internet service provider

9.  In 2002, the Securities and Exchange
Commission started their investigation on
accounting policies and loans to executives
 Consequences of the Investigation
• Lost Value with share price falling to pennies
• Around 20,000 Job Cuts
• Exited certain business sectors
• CEO Ebbers resigned
• CFO Sulivan was sacked
• Was listed as “Junk” status
• Filed for Bankruptcy

10.  Over expansion strategies & industry
recession
Increase in E/R ratio
• WorldCom outsourced
some portions of its calls
Hefty fines for unutilized
leased networks.
• Paid the outside service
providers for carrying
WorldCom customers’
Decline in the growth of
telecommunication industry
calls on their lines.
reducing the demand
• Took majority of its lines
on lease. Anticipated high demand in the
industry. Increased their leased
networks

11. • Prices for long-distance communication
services were falling
DOT COM Bubble Burst
Refusal of merger with Sprint (Largest wireless network company then) by
US Justice Department to regulate the Telecommunications Industry.

12.  Accounting fraud
EEXXPPEENNSSEE VVSS CCAAPPIITTAALL
EEXXPPEENNDDIITTUURREE
WorldCom’s CEO Ebbers
and CFO Sullivan
Cooper‘s internal audit team discovered $2.3 billion fraud
including $500 million in undocumented computer expenses

13. LLaacckk ooff ccoorrppoorraattee
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Board of Directors
• Did not make any attempt to control organization’s debt levels - WorldCom is
accounted for over 250 million dollar credit issued to Telecommunications
Customers.
• approved billions of dollars without any management information and without
even considering the terms and conditions or implications of the deal.
-WorldCom has paid 22.8 million dollars in revenue for Early Termination
Penalties.
Audit
Internal audit
•The internal auditing operation within the company was purposely diverted away
from auditing responsibilities and concentrated upon increased efficiencies and
cost-cutting instead of searching on internal affairs.
•understaffed, underpaid and under-qualified to carry out a responsible internal
audit function.
External audit
•Arthur Andersen the external auditing team identified WorldCom as a “maximum
risk” client, but failed to act consistently and overlooked serious deficiency in the
accounting ledgers
.
Personal Finances
• Many senior executives, including the CEO Ebbers had private finances and
debts taken on stocks of the company. The board approved over 400 million
dollar loans to Ebbers, without any assurances or knowledge of use of those
funds

14. CCoorrppoorraattee CCuullttuurree
autocratic style of management and followed a top down approach
no outlet for employees to express their concerns.
Top hierarchy granted compensation and bonus beyond the
company guidelines to a select group of individuals based on
their loyalty to them
Senior officials favored those especially loyal, preferable from
financial, accounting and Investor relations departments leading
to bias between departments and employees

15. SSuummmmaarryy
-The domination of Ebbers and no checks and constraints placed
on his actions.
-For personal gains under pressure to meet numbers.
-Lack of corporate governance.
-Employees failure to communicate fraudulent activities
-A financial system with no control mechanism
-Audit company’s failure of the company and its culture
understanding
-Inadequate audit by independent auditors

16.  Legal and Ethics Programs
 The Risk Management Committee
 The Audit Committee
 The Board of Directors
 Executive Compensation
 Communication and Trainings
 Secure Organization
 Preventing Accounting Frauds

17.  Legal and Ethics Programs
The best way to establish Ethics and Legal standards
is to communicate the Code of conducts which will
lead the employees in the direct path.
 Ethics office
 Legal Department
 Ethics Programs
 Diversity Issues

18.  The Risk Management Committee
 A committee to identify the major risk
factors of company and the strategies to
mitigate such risks with a minimum of three
independent directors with good
experience.
 The committee must disclosure
company's risks in all documents. These
risks would include all processors of the
company from Technology, Networks,
Finance and many. The risk management
meetings can be set in certain time
duration but not less than six times in an
year.

19.  The Audit Committee
• Leadership Rotation
• Use of Corporate Aircraft and Other Corporate
Assets
• Required Resources for Audit Committee
• External Audit Oversight
• Internal Audit
• Disclosure Review

20.  The Board of Directors
• Meetings and Commitment
• Director Training and Retaining
• Qualification Standards for the Board:
A Director should not have any personal or financial
links with the CEO
A Director should not have any conflict of interest
with the company
Skills with regards to Ethics, Financial, senior
management expectance planning and control

21.  Executive Compensation
 Control over Severance Programs
Severance Programs are protection tool for an
employee if case of loss of employment where
the employee will be getting an income till they
finds another Job. Ebbers was paid exceptionally
long term Severance package.
 Implement Strict Controls on Executive Loans
The company should ensure that there is a limit
to the executive loan scheme and should
accounted to repay in due time.

22.  Communication and Trainings
Communication within an organization will help to prevent
fraud activities. An effective training programmes will
meet the below criteria:
It must fully cover the job roles and risks involved in
them.
Regular training programmes
Case studies of real world examples and necessary
actions
Clear and simple to understand
 Whistle blowing and Open Communication
Employees should be given communication channels to
freely communicate any misconduct..
Confidentiality
Anonymity
Organization - wide Availability
Classifications and financial reporting Concerns

23.  Secure Organization
• Set clear standards - Set clear standards objectives
and lead the organization towards the mission which
will help employees to work in line with company's
expectations.
• Check employee references - This will provide an
understanding of the employees background when
hiring. Human Resources will be able to identify if
anyone has come from credit, licensing and criminal
history.
• Information Security - Setting standards and
protocols in information retention policy. Also
keeping a track on employees who view sensitive
information very often.

24.  Preventing Accounting Frauds
• Minimize Cash transactions :Policy that authorized person
will be able to sign off cash transactions.
• Periodical reconciliation with parties: The payables and
the receivables should be tallied regularly.
• Protect your paperwork: All transactions no matter how
small they are should be documented and all such
paperwork should be well filed and stored in a safe place
with only authorized personal to have access.
• Reconcile bank accounts and review statements: Bank
statements must be review against the cash statements
with deposits and payments.
• External Audit and surprise Internal Checks: Regularly
external audits should be arranged and conducted to
ensure that no deviations or frauds are taking place. In
addition checks should be carried out randomly by the
internal audit team to ensure that standards are being
followed.

25.  To Implement the Sarbanes–Oxley Act
• It provides a comprehensive and clear structure of
the way of financial statement should be presented.
• The purpose of this act to provide confidence to
investors and accountability, reliability and
transparent of financial statements.
• Promotes penalties like fines and jail time etc if rules
are no met. As a part of this act it allows the top
executive of an organization to certify that the
presented financial statements are fair and accurate.

26.  What the company thought of as good for
them, ended up being a reason for their
failure.
 Proper controls along with strict internal and
accounting policies need to be in place.
 Employee needs to be educated on ethical
and legal aspects.