How Did it Happen? An Enormous Fraud in a Mundane Way

1. How Did it Happen?An Enormous Fraud in a Mundane Way Anchel Kumar, Morgan Oddie and Kaleigh Pinto

2. Presentation Outline • What happened? • How did it happen? • What are the implications?

3. Background • About 65 acquisitions • 1991 – 1997 : $60 Billion in acquisitions, $41 Million in debt • By 1997, WorldCom’s stock price had risen to approximately $60 per share

4. What’s Wrong with That? • Integrating the businesses WorldCom had acquired • Financial integration(“liberal interpretation of accounting rules”)

6. Two Simple Accounting Changes • ‘Line costs’ were under-reported by capitalizing it rather than properly expensing it on the balance sheet • Revenues inflated like a balloon with fake accounting entries classified as “corporate unallocated revenue accounts”

7. Effects to the Company • Net income went up • No change in revenue • No change in cost of goods sold (COGS) • Big decrease in operating expenses

8. (Fraudulent) Creative Accounting

9. Post Filing of Bankruptcy • 30,000 jobs lost • TSX Plummet • Leading Factors to SOX

10. SOX Development • Greater Management Responsibility • Public Company Compliance • C-SOX • “I did not know” excuse

11. SOX Mandates Relation to WorldCom • Total of 11 mandates • Section 302 – Onus on Management • Section 404 – Internal Control

12. Questions?