WorldCom's competitors had complained to the SEC about how everyone in the telecommunication industry was losing money except WorldCom.
Andersen used a "risk based" model of auditing. Risk based auditing is based on the assumption that problems are most likely to occur in high risk areas, so that the auditors would focus most of their time on these areas. On June 28, 2002, WorldCom announced it would lay off 17,000 employees to reduce costs. On July 1, 2002, an internal review concluded that the fraud may have started in 1999 instead of 2001. On July 21, 2002, WorldCom declared bankruptcy. It was the largest bankruptcy in the history of American Commerce. WorldCom had assets of $107 billion. On August I, 2002, CFO Scott Sullivan and Controller David Myer were charged with fraud. The estimated level of fraud had escalated to $7.6 billion. By November 2002, the fraud estimate had increased to $9 billion. In February 2003, WorldCom announced it would lay off another 5,000 employees. In March 2004, Ebbers was indicted on fraud charges and Scott Sullivan pled guilty.
WorldCom changed its name to MCI and emerged from bankruptcy on April 20, 2004. On May 10, 2004, MCI announced that would lay off 7,500 additional employees. On March I5, 2005, a Jury found Ebbers guilty of conspiracy, fraud and making false financial statements. Bernie Ebbers was sentenced to 25 years in prison. Scott Sullivan was sentenced to 5 years in prison and former Controller, David Myers, was sentenced to one year plus one day in prison.
Questions for Thought
1. Why do you suppose Bernie Ehbers was treated more like a leader of a cult than as a CEO? Explain.
2. Evaluate the recommendations in the Breeden report. Will these accomplish the objectives they are supposed to achieve?
3. Do you view Cynthia Cooper as an ethics exemplar in this case? Explain.