WorldCom was the United States' second largest long distance phone company behind AT&T but in 2002 it came under heavy scrutiny for major accounting fraud and stock fraud as it appeared they had massively inflated earning and under-reported losses.
WorldCom initially grew largely due to smart acquisitions of other telecommunications companies, including the high profile buy out of MCI Communications. WorldCom appeared on top of the world – innovative, profitable and growing with new telecommunication technology. It was discovered, however, that between 1999 and 2002, the company used various fraudulent accounting methods to hide the declining profits and financial health of WorldCom. These false accounting methods created a false impression of profitability and even growth which supported the maintenance of the WorldCom stock price.
The executives at WorldCom committed the fraud by hiding various costs and inflating expenses. They under-reported on telecom line costs, capitalizing them on the balance sheet rather than citing them as expenses and the falsely inflated revenues by entering false accounting entries from various “corporate unallocated revenue accounts’. Clearly by under-reporting losses and overstating revenues they made the company look much healthier than it was. This led to a belief by the stock exchange that the company was stable and led brokers to recommend the stock to investors. This was, in ever essence, an instance of major, corporate wide and systemic stock fraud.
WorldCom conducted an internal audit that revealed almost $4 billion of the fraud in 2002 while conducting a simple examination of capital expenditures. It quickly alerted WorldCom’s new auditing team from the firm of KPMG. When the board of directors was informed of the problem they moved quickly and without hesitation firing or requesting the resignation of several executives and reporting the corrected earnings to stockholders. This obviously yielded a huge loss and alerted the U.S Securities and Exchange Commission (SEC) who then launched their own investigations. At the close of business in 2003, the final tally of the fraud was close to $11 billion. Ultimately, the SEC filed a civil lawsuit, based on fraud against WorldCom.
WorldCom’s actions, like those of Enron, equate to being one of the biggest accounting scandals in history. These scandals rocked consumer confidence in most big business and caused most people to fear buying stocks and securities for fear that their investments would meet the same fate as people who bought into Enron and WorldCom. The most frustrating aspect of these scandals is not only the widespread damage to small investors but also the gross personal fortunes that most of the executives of these companies amassed and still have access to, today.
If you have been the victim of a major stock fraud like that of Enron or WorldCom, you aren’t without recourse. You can contact the federal government or your own attorney to submit a claim or file a lawsuit to get compensation for your losses. This kind of stock fraud is illegal and should not be tolerated. Don’t let your life savings be taken away because of widespread accounting errors or stock fraud.