Definition
WorldCom was a U.S.-based telecommunications company that became the second-largest long-distance phone company in the country. It’s notable for conducting one of the largest accounting frauds in history, eventually filing for bankruptcy in 2002. Now it is part of Verizon following a merger with MCI, a company WorldCom had previously acquired.
Phonetic
The phonetic spelling of WorldCom is: /ˈwɜːrldˌkɒm/
Key Takeaways
- WorldCom was a U.S-based telecommunications company that perpetrated one of the biggest frauds in history. It filed for bankruptcy in 2002 after revealing that $11 billion in profits were falsely reported.
- The company’s management team, led by CEO Bernard Ebbers, was at the heart of the fraud. They used several techniques to mislead auditors and regulators, which led to criminal charges and incarcerations.
- The WorldCom scandal spurred significant changes in regulations and safeguards to protect against corporate fraud. New laws such as the Sarbanes-Oxley Act were enacted to strengthen corporate governance, financial transparency and legal protections for whistleblowers.
Importance
WorldCom is an important term in the categories of business and finance primarily due to its prominent role in one of the largest accounting fraud scandals in U.S. history. Formerly a telecommunications company, WorldCom became infamous in 2002 when it declared bankruptcy following the revelation of an $11 billion fraud that led to the downfall of the organization. This high-profile corporate scandal was instrumental in emphasizing the necessity for enhanced corporate governance and financial disclosure regulations, leading to the subsequent implementation of the Sarbanes-Oxley Act in 2002. As such, WorldCom’s collapse demonstrated the drastic consequences of corporate fraud on a grand scale and marked a milestone towards the development of stricter financial corporate accountability and transparency in business operations.
Explanation
WorldCom was a telecommunications company that was once the second-largest long-distance phone service provider in the United States. Established in the 1980s, the company played a significant part in the technological and communications revolution. The primary purpose of WorldCom was to provide an affordable and reliable long-distance telecommunication service to its consumers. With technological advancements, WorldCom expanded its services to include Internet service provisions and data communication like emails, making it a significant player in the technological and communication industry in the boom years of the late 1990s to early 2000s.WorldCom gained substantial recognition not only for its monumental growth and contributions to the telecommunications sector but also for being involved in one of the largest accounting scandals in U.S history. The company was used as a vehicle by certain high-ranking authorities to deceive investors, inflate share prices and hide gargantuan losses through unethical accounting practices. These actions resulted in a multi-billion dollar fraud that led to the company filing for bankruptcy in 2002, causing significant loss to investors and altering the landscape of corporate governance and financial reporting regulations.
Examples
1. WorldCom Accounting Scandal (2002): This is perhaps the most infamous event in WorldCom’s history. The company admitted to having inflated its earnings by approximately $3.8 billion over the previous five years. This is still one of the biggest accounting frauds in U.S history. The scandal led to significant legal actions and the company’s bankruptcy. 2. Merger with MCI (1998): Another significant event related to WorldCom was its merger with MCI Communications. The merger was valued at $37 billion, making it the largest in U.S. history at that time. The merger led to the creation of MCI WorldCom, which was later renamed WorldCom.3. Acquisition attempts: WorldCom also made a bold attempt to acquire Sprint, the third-largest long distance telephone company in the U.S., in 1999. It was an audacious move to create the world’s largest telecommunications company but ultimately failed due to regulatory rejections from both U.S. and European Union regulators. This failure was a setback to WorldCom’s expansion plans and contributed to its eventual downfall.
Frequently Asked Questions(FAQ)
What is WorldCom?
WorldCom was a U.S.-based telecommunications company that became the second-largest long-distance phone company in the country before its downfall due to a massive accounting scandal.
When was WorldCom established?
It was originally founded in 1983 as LDDS Communications. The name was changed to WorldCom in 1995.
What services did WorldCom provide?
WorldCom was primarily a long-distance telephone and data services provider. In its heyday, it was a major global communications provider with over 20 million residential and business customers.
What is WorldCom famous for?
WorldCom is infamous for its major corporate fraud scandal in 2002. Approximately $11 billion of the company’s profits were fraudulent, making it one of the biggest accounting scandals in U.S. history.
Who was responsible for the WorldCom scandal?
The WorldCom scandal was largely orchestrated by CFO Scott Sullivan, under the apparent knowledge or indifference of CEO Bernard Ebbers, who was convicted of conspiracy and securities fraud.
What were the consequences of the WorldCom scandal?
Following the disclosure of the scandal, the company filed for bankruptcy in 2002. It reemerged in 2004 under the new name of MCI, Inc. In 2006, Verizon Communications acquired MCI.
How did the WorldCom scandal affect the telecommunications industry?
The scandal led to tighter regulations in the industry with the passage of the Sarbanes-Oxley Act. The act increased transparency in corporate governance and financial management.
How did WorldCom’s scandal impact investors?
The scandal erased about $180 billion in market value, affecting thousands of investors. This led to stricter laws and regulations regarding investor protection.
Related Finance Terms
- Bankruptcy
- Accounting Scandal
- Bernard Ebbers
- Telecommunications
- Securities and Exchange Commission (SEC)
Sources for More Information
