ANSWER

BERNIE EBBERS WORLD COM CASE

What Was WorldCom?

WorldCom was not just the biggest accounting scandal in the history of the United States—it was also one of the biggest bankruptcies of all time. The revelation that telecommunications giant WorldCom had cooked its books came on the heels of the Enron and Tyco frauds, which had rocked the financial markets. However, the scale of the WorldCom fraud put even them in the shade.

WorldCom and Bernie Ebbers

WorldCom has become a byword for accounting fraud and a warning to investors that when things seem too good to be true, they just might be. Its CEO, Bernie Ebbers—a larger-than-life figure whose trademark was cowboy boots and ten-gallon hat—had built the company into one of America’s leading long-distance phone companies by acquiring other telecom companies. At the peak of the dotcom bubble, its market capitalization had grown to $175 billion.

When the tech boom turned to bust, and companies slashed spending on telecom services and equipment, WorldCom resorted to accounting tricks to maintain the appearance of ever-growing profitability. By then, many investors had become suspicious of Ebbers’ story—especially after the Enron scandal broke in the summer of 2001.

Shortly after Ebbers was forced to step down as CEO in April 2002, it was revealed that he had, in 2000, borrowed $400 million from Bank of America to cover margin calls, using his WorldCom shares as collateral. As a result, Ebbers lost his fortune. In 2005 he was convicted of securities fraud and sentenced to 25 years in prison.

AFTER THIS CASE CERTAIN GUIDELINES WERE MADE IN THE NAME OF SARBANES-OXLEY ACT

After massive scandals by companies such as WorldCom and Enron, the government enacted the Sarbanes-Oxley Act (SOX) to increase investor confidence in financial markets and public companies. Before the act, there were many loopholes public companies could take to mislead and defraud investors. Some important changes SOX made include

• Increasing the prevalence of audit committees
• Mandating internal controls for public companies
• Preventing more than two Board members from being certified public accountants
• Increasing criminal penalties for securities fraud
• Mandating companies change audit partners every five years