Order Code RS21253

Current August 29, 2002

CRS Report to get Congress

Received through the CRS Web

WorldCom: The Accounting Scandal

Bob Lyke

Consultant in Cultural Legislation

Home Social Insurance plan Division

Draw Jickling

Consultant in Public Fund

Government and Finance Section

Summary

Upon June twenty-five, 2002, WorldCom, the Nation's second largest very long distance telecoms company, declared that it had overstated earnings in 2001 plus the first 1 / 4 of 2002 by much more than $3. eight billion. The announcement amazed financial analysts and, approaching top of accounting complications at additional corporations, a new noticeable impact on the financial markets. The accounting maneuver responsible for the overstatement – classifying obligations for using other companies' communications networks as capital expenditures – was seen as the press as scandalous, and it was immediately asked why Arthur Andersen, you’re able to send outside auditor at the time, had not detected this. WorldCom registered for bankruptcy protection in July twenty first. On August 8th, the organization announced that completely also altered its arrange accounts lately, affecting one more $3. 8 billion.

Response in Wa was speedy. On June 26th, the U. H. Securities and Exchange Commission rate (SEC) recharged the company with massive accounting fraud and quickly obtained court purchase barring the company from destroying financial documents, limiting it is payments to past and current management, and requiring an independent keep an eye on. Hearings were hosted by the Home Committee upon Financial Services on July 9th and by the Senate Panel on Trade, Science, and Transportation on July 30th. Several company officials have been indicted.

The fundamental economic issue confronting WorldCom is the great oversupply in the Nation's telecommunications capacity, a byproduct of overly optimistic projections of Internet growth. WorldCom and other telecoms firms encountered reduced demand as the dot–com boom ended plus the economy joined recession. All their revenues include fallen less than expectations, while the debt that they took on finance enlargement remains high. As the stock market worth of these businesses has plunged, corporate management has had an excellent incentive to interact in accounting practices that conceal unfortunate thing.

Congressional Exploration Service Лњ The Library of Congress

CRS-2

History. WorldCom Incorporation. began like a small Mississippi provider of long length telephone service. During the 1990s, the company made several acquisitions of other telecommunications firms that boosted their reported earnings from $154 million in 1990 to $39. a couple of billion in 2001, positioning it 42nd among Fortune 500 companies. Noteworthy purchases included the 1998 takeover of MCI, which made it the second major U. H. long length carrier, plus the purchases of UUNet, CompuServe, and America Online's info network, which will put WorldCom among the leading operators of sites infrastructure.

The fundamental economic trouble confronting WorldCom is the vast oversupply in telecommunications potential that come about in the nineties, as the industry hurried to build dietary fiber optic networks and other infrastructure based on extremely optimistic predictions of Internet progress. WorldCom and other telecommunications companies have encountered reduced require as the dot–com boom ended as well as the economy moved into recession. Their particular revenues possess fallen less than expectations, whilst debt taken on to financing mergers and infrastructure purchase remains.

WorldCom is not the only telecommunications firm in financial trouble. The down sides of Qwest Communications, Global Crossing, Adelphia, Lucent Solutions, and Enron (which experienced major purchases of internet ventures) have been extensively reported. one particular As in these other firms, shareholders in WorldCom have endured major failures: the market benefit of the industry’s common share plunged via about $150 billion in January 2k to less than $150 million as of This summer 1, 2002. Depending on the end result of...