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Case Study. People Involved

The WorldCom fraud case involved key figures such as CEO Bernard Ebbers, CFO Scott Sullivan, and VP of Internal Audit Cynthia Cooper, who played significant roles in executing and uncovering fraudulent accounting practices that inflated the company's earnings. The scandal led to the company's bankruptcy and significant prison sentences for those involved, including Ebbers' 25-year sentence. External auditor Arthur Andersen faced criticism for failing to detect the fraud, further damaging its reputation in the accounting industry.

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34 views3 pages

Case Study. People Involved

The WorldCom fraud case involved key figures such as CEO Bernard Ebbers, CFO Scott Sullivan, and VP of Internal Audit Cynthia Cooper, who played significant roles in executing and uncovering fraudulent accounting practices that inflated the company's earnings. The scandal led to the company's bankruptcy and significant prison sentences for those involved, including Ebbers' 25-year sentence. External auditor Arthur Andersen faced criticism for failing to detect the fraud, further damaging its reputation in the accounting industry.

Uploaded by

Ajajajja
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Case Study: WorldCom Fraud

People Involved
1) Bernard Ebbers
 CEO of WorldCom; the central figure in the scandal.
 Co-founded Long Distance Discount Services (LDDS) in 1983, eventually
becoming WorldCom.
 Known for his aggressive expansion strategy, acquiring over 60
companies as CEO.
 Convicted of fraud, conspiracy, and filing false documents with regulators;
sentenced to 25 years in prison.
Ebbers was accused of directing the fraud by instructing his CFO, Scott Sullivan, to “make
the numbers” match Wall Street’s expectations. He allegedly turned a blind eye to the
fraudulent accounting practices being used to hide the company’s true financial condition.

2) Scott Sullivan
 CFO of WorldCom, played a central role in executing the fraudulent
scheme
 A highly regarded financial officer who joined WorldCom in 1996.
 Known for his financial knowledge and skill and was once considered one
of the most powerful CFOs in the country.
 In 2004, Sullivan pleaded guilty to securities fraud, conspiracy, and other
charges. Sullivan was sentenced to 5 years in prison and was released in
2009.

Under his direction, WorldCom's accounting department engaged in practices that hid
billions of dollars in expenses by improperly categorizing them as capital expenditures, thus
inflating the company’s earnings.

Sullivan instructed the accounting team to make false entries that would meet financial
projections. He was directly involved in manipulating financial statements to deceive
investors and the public.

3) David Myers
 Controller of WorldCom, responsible for overseeing the company's
financial records and ensuring their accuracy.
 Myers pleaded guilty to conspiracy and securities fraud charges. He was
sentenced to one year and one day in prison.

Myers was deeply involved in the day-to-day execution of the fraudulent activities. He
followed orders from Scott Sullivan to make improper accounting adjustments that falsely
improved WorldCom's financial position.

Myers directed his subordinates to alter the company’s books, knowing that the adjustments
were fraudulent. He played a key role in ensuring the fraud went undetected for several
years.

4) Betty Vinson and Troy Normand


 Were mid-level accounting employees at WorldCom, tasked with making
the actual journal entries that would carry out the fraud.
 Both Vinson and Normand pleaded guilty to conspiracy and securities
fraud charges, they were sentenced to five months in prison and five
months of home confinement

5) Kim Emigh
 Was a senior manager in the internal audit department at WorldCom.
 Emigh was among the first employees to raise concerns about the
suspicious financial practices at WorldCom.

He noticed irregularities in accounting, particularly the improper capitalization of expenses,


which was a key element in the fraud. He reported these concerns to his superior including
the CFO; however, his concerns were dismissed, and no immediate action was taken. As a
result of his action, he was eventually fired by WorldCom.

6) Cynthia Cooper
 Vice President of Internal Audit at WorldCom.
 Played a critical role in uncovering the fraud.
 For her efforts, she was named one of Time Magazine’s Person of the Year
in 2002.
Cynthia Cooper, together with Gene Morse – a member of the internal audit – caught wind of Emigh’s
allegations and decided to investigate.

When Cooper and her auditing team investigated Emigh’s claims, they stumbled over $1.4 billion in
capital expense entries for “prepaid capacity,” with which there was nothing to back up those entries—no
invoices, receipts, or supporting documentation of any kind.

Auditors uncovered $3.9 billion in operating expenses that had been transferred to capital expense
accounts. Cooper went to the chair of WorldCom’s board’s audit committee and blew the whistle on the
company’s fraudulent accounting.

7) Arthur Anderson
 WorldCom’s External Auditor
 Criticize for failing to detect the fraud despite obvious red flags,
damaging the firm’s reputation.
While Andersen’s accounting firm did not engage in the fraud directly, its failure to detect
and report the fraudulent activities at WorldCom contributed to the financial losses suffered
by investors and the eventual collapse of the company.

8) Jack Grubman
 One of the most powerful and well-known analysts in the
telecommunication sector.
 Grubman’s report and recommendations had a significant impact on
stock prices and were instrumental in driving investment into telecom
companies during the tech boom of the late 1990s.
 He constantly issued “buy” ratings for WorldCom Stock, even as the
company’s financial health deteriorated.
 He was fined $15 million and was banned from any activity in securities
exchanges.
Wall Street analyst Jack Grubman gave the company consistently high ratings even though
the company (along with other telecoms) performed poorly. His positive reports helped
sustain investors’ confidence in WorldCom, contributing to the company’s ability to continue
despite underlying financial problems.
Hayes, A. (2024b, June 14). The Rise and Fall of WorldCom: Story of a scandal.
Investopedia. https://www.investopedia.com/terms/w/worldcom.asp
Fraudulent accounting and the downfall of WorldCom. (n.d.). Audit & Advisory
Services.
https://sc.edu/about/offices_and_divisions/audit_and_advisory_services/
about/news/2021/worldcom_scandal.php
International Banker. (2021, September 29). The WorldCom Scandal (2002).
https://internationalbanker.com/history-of-financial-crises/the-worldcom-
scandal-2002/
WorldCom - The Players | The Wall Street Fix | FRONTLINE | PBS. (2015, November
18).
https://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/wcom/players.ht
ml

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