WorldCom chief dies after accounting fraud jail term
4 Feb 2020
The former CEO of WorldCom, who was sentenced to 25 years over an $11bn (£8.4bn) accounting fraud, has died shortly after leaving prison
4 Feb 2020
Bernie Ebbers was involved in the biggest accounting scandal and bankruptcy in US history when he was head of telecoms giant WorldCom.
He was found guilty in 2005 of securities fraud, conspiracy and filing false statements following a trial in the US District Court for the Southern District of New York.
WorldCom overstated income and cash flow by capitalising expenses. It inflated profits by $3bn in 2001 and $797m in Q1 2002, resulting in a profit of $1.4bn instead of a net loss. The company’s auditor Arthur Andersen signed off the accounts for year end 2001 shortly before WorldCom filed for bankruptcy in July 2002.
As early as 1999 and 2000, WorldCom had reduced its reported line costs by approximately $3.3bn. This was accomplished by improperly releasing ‘accruals,’ or amounts set aside on WorldCom’s financial statements to pay anticipated bills.
These accruals were supposed to reflect estimates of the costs associated with the use of lines and other facilities of outside vendors, for which WorldCom had not yet paid. ‘Releasing’ an accrual is proper when it turns out that less is needed to pay the bills than had been anticipated.
It had the effect of providing an offset against reported line costs in the period when the accrual was released. Thus, it reduced reported expenses and increased reported pre-tax income.
At the trial prosecutors argued that Ebbers allowed the accounting fraud in order to protect his own wealth which was built mainly on WorldCom stock. Ebbers also took $400m in loans from WorldCom.
‘In 2002 investigators concluded that Bernie Ebbers, the WorldCom CEO, “created, and the board permitted, a corporate environment in which pressure to meet the numbers was high, departments that served as controls were weak, and the word of senior management was final and not to be challenged”, said Emile Woolf FCA, a retired forensic accountant.
‘The $11bn fraud was followed by a trial at which counsel for WorldCom’s investors said “that fraud could have been stopped dead in its tracks if Arthur Andersen had been looking to do its job instead of looking to line its pockets".’
The CFO, Scott Sullivan, and CEO, Bernard Ebbers, both claimed they were unaware of anything fraudulent occurring at the company. This highlighted the lack of corporate governance and financial oversight, ultimately leading to US authorities introducing the Sarbanes-Oxley Act in July 2002.
After being convicted, Ebbers gave up most of his assets valued at around $35m and paid a fine of $5bn.
When the company went bankrupt it left a global workforce of 80,000 employees jobless and resulted in substantial losses for shareholders.
The Canadian businessman died on 2 February 2020 just after his early release in December 2019. His 25-year prison in sentence was cut to 13 years due to poor health.