CandleFocus

WorldCom

Candlefocus Editor

WorldCom was created in 1983 and is one of the oldest telecommunication companies in the United States. Originally founded as Long Distance Discount Services (LDDS) by Bernard Ebbers and Murray Waldron, its primary services were long-distance telephone services. It was the first competitive telephone service provider in the South and in areas where the triopoly of AT&T, GTE and Southern Bell held a monopoly. During the 1990s, the company expanded rapidly through a series of acquisitions, becoming one of the largest telecommunication companies in the world.

In 2002, WorldCom came under scrutiny when it became apparent that their chief financial officer, Scott Sullivan, was using accounting methods to hide losses the company was incurring. This included purposely misclassifying expenses, such as leasing payments and capacity costs, as capital expenditures to reduce the reported losses of the company. Sullivan was fired, and many other corporate officers are facing a number of criminal charges. The scandal from the misstated financial information cost many investors, as share prices dropped more than 70%.

The company filed for bankruptcy in 2002 as a result of the scandal and its massive losses. WorldCom emerged from bankruptcy in 2004 under a new name, MCI, and reorganized its business structure. In 2005, WorldCom was acquired by Verizon Communications and went on to become part of the Verizon Business Group. To this day, it is the largest telecommunication bankruptcy in U.S. history.

The WorldCom scandal showed that investors must be vigilant in scrutinizing a company’s financial reports and be wary of gimmicky accounting methods. It also demonstrated that even corporations with a long history and successful operations could be ruined by irresponsible decision-making. The WorldCom scandal is a useful cautionary tale that other firms should take to heart.

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