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Worldcom

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Company’s History
WorldCom, a long distance discount telephone service, was founded by Bernard Ebbers in 1983. Bernard Ebbers became the CEO in 1985 and the company went public in 1989. Bernard Ebbers was also listed in Forbes as one of the richest men in the U.S. At its peak, WorldCom had about 20 million customers and 80,000 employees and was the second largest long distance carrier in the U.S. WorldCom grew largely by aggressively acquiring other telecommunication companies like MCI Communications. WorldCom also owned UUNET, who controls over 50% of the wires that internet service providers use to carry internet traffic all over the world. Even before the fraud began, the company was already going through financial difficulties due to a large amount of debt and declining revenue. Its $40 billion merger with MCI was the largest in history. They tried to merge with Sprint in mid-2000 but the U.S. Justice Department did not approve.

How was the fraud perpetrated?
The fraud was not perpetrated in lower levels of the organization. Upper management improperly booked $3.8 billion as capital expenditures, boosting cash flow and profit over 5 quarters, disguising an actual net loss for 2001 and the first quarter of 2002. WorldCom’s management did not account for expenses when it incurred them, instead hiding expenses by pushing them into the future. This made it seem as if they were spending less and making more money. This caused investor confidence to rise, and the stock price to increase at a time when other telecommunications companies were struggling.
By reclassifying operating expenses as capital expenditures, WorldCom was secretly hiding a large amount of expenses. Operational expenses are decreases in the company’s assets from its profit-directed activities, and result in negative cash flows (Williams). Examples of operational expenses are office

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