WorldCom Fraud & Bankruptcy (21/07/2001); Assets: $107 billion Long Distance Discount Services, Inc. (LDDS) began in Hattiesburg, Mississippi. in 1983. The company name was changed to LDDS WorldCom in 1995, and later just WorldCom. The company’s growth under WorldCom was fueled primarily through acquisitions during the 1990s and reached its apex with the acquisition of MCI in 1998. WorldCom’s financial scandals and bankruptcy led that company to change its name in 2003 to MCI. The MCI name disappeared in January 2006 after the company was bought by Verizon.
WorldCom’s bankruptcy filing in 2002 (21st July 2002) was the largest such filing in U. S. history. The WorldCom scandal is regarded as one of the worst corporate crimes in history, and several former executives involved in the fraud faced criminal charges for their involvement. Evidence shows that the accounting fraud was discovered as early as June 2001, when several former employees gave statements alleging instances of hiding bad debt, understating costs, and backdating contracts. In 2002, a small team of internal auditors at WorldCom worked together, often at night and in secret, to investigate and unearth $3. billion in fraud and the U. S. Securities and Exchange Commission (SEC) launched an investigation into these matters on June 26, 2002. By the end of 2003, it was estimated that the company’s total assets had been inflated by around $11 billion. As a result, the SEC filed a civil fraud lawsuit against WorldCom and federal charges were filed against several executives. The fraud was accomplished primarily in two ways: 1. Underreporting ‘line costs’ (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them. . Inflating revenues with bogus accounting entries from “corporate unallocated revenue accounts”. Some of the high-ranking WorldCom executives and other employees who are implicated in the accounting fraud. Most notably, company founder and former CEO Bernard Ebbers was sentenced to 25 years in prison, and former CFO Scott Sullivan received a five-year jail sentence, which would have been longer had he not pleaded guilty and testified against Ebbers. WorldCom, crushed by its $41 billion debt load, made its filing in the Southern District of New York.
With $107 billion in assets. Under the bankruptcy reorganization agreement, the company paid $750 million to the SEC in cash and stock in the new MCI, which was intended to be paid to wronged investors. Enron Fraud & Bankruptcy (12/02/2001); Assets: $65. 5 billion The Enron Corporation (former NYSE ticker symbol ENE) was one of the largest energy company based in Houston, Texas that sold electricity and natural gas. They were also involved in the distribution of energy and risk management and financial services to many people worldwide.
Enron employed approximately 22,000 and was one of the world’s leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of nearly $101 billion in 2000. This company gained wealth due to its initiative marketing and endorsement of power and communications services and risk management offshoots. Fortune named Enron “America’s Most Innovative Company” for six consecutive years. The company became very successful and seemed indestructible. Everything seemed rosy until they filed for bankruptcy in 2001.
At the end of 2001 it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the “Enron scandal”. With all this success and rapid expansion the company had to borrow money. This was in a bid to cover up their excess debts. The debts would have made the stock value dip and they could not take that chance. So they opted to hide their debts in ‘partner’ corporations. With this information under wraps Enron kept looking better because of their unethical and illegal accounting practices.
They also began favoring potential large investors with insider information while ignoring the smaller investors. Other industry peers began questioning how the company made so much money time and again. While all this was going on the company’s CEO was secretly selling his stock. By October 2001, they could no longer hide the illegal practices in the company. They announced a loss of $ 638 million dollars. The stock price took a dive until it was worth nothing. Then came in the creditors claiming their debts be paid before the company shut its doors. Since they could not repay its debts, the company was forced to file for bankruptcy.
Besides the financial department, the operations management department also had a role to play in the collapse. The company’s values and principles were not followed since most employees were in it to also get rich. The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron undoubtedly is the biggest audit failure.
On January 17, 2002 Enron fired Arthur Andersen as its auditor, citing its accounting advice and the destruction of documents. Enron was estimated to have about $23 billion in liabilities, both debt outstanding and guaranteed loans. Citigroup and JP Morgan Chase in particular appeared to have significant amounts to lose with Enron’s fall. Additionally, many of Enron’s major assets were pledged to lenders in order to secure loans, throwing into doubt what if anything unsecured creditors and eventually stockholders might receive in bankruptcy proceedings.