when the tech boom turned to bust and companies slashed spending on telecom services and equipment worldcom resorted to accounting tricks to maintain the appearance of ever growing profitability by then many investors became suspicious of ebbers story especially after the enron scandal broke in the summer of 2001 
in 2002 it was revealed that ebbers borrowed 408 million from worldcom s board of directors to cover margin calls on loans secured by company stock at the same time the company s accounting fraud and real financial situation were coming to light as the sec began to investigate as a result ebbers met his downfall and resigned as ceo on april 30 2022 in 2005 he was convicted of securities fraud conspiracy and making false filings and sentenced to 25 years in prison ebbers was a larger than life figure whose trademark was a 10 gallon hat and cowboy boots cooking the booksthere were several factors that pushed worldcom into a loss the company pursued acquisitions aggressively buying up rival companies in an attempt to gain market share this coupled with a major drop in revenue and rates pushed the company into further into the red executives needed a way to prove worldcom was still financially viable to its board and shareholders worldcom used a series of questionable accounting techniques to hide its financial position which inflated its profits this amounted to billions in capital expenditures being improperly recorded on the books but this was hardly a sophisticated fraud in order to hide its falling profitability worldcom inflated net income and cash flow by recording expenses as investments by capitalizing expenses it exaggerated income by 3 8 billion including 3 055 billion in 2001 and 797 million in the first quarter of 2002 reporting a net profit of 1 38 billion instead of a net loss to hide its falling profitability worldcom inflated its net income and cash flow by recording expenses as investments reporting a profit of 1 38 billion instead of a net loss the whistleblowersseveral individuals played a key role in exposing the fraud at worldcom these people included cynthia cooper who was vice president of worldcom s internal audit department and gene morse another auditor they became concerned about several inconsistencies in the company s financial records including cooper and morse conducted investigations on their own as well as an audit they were challenged by the company s chief financial officer cfo scott sullivan who requested that the process be delayed they contacted kpmg the external auditor that replaced arthur andersen as well as worldcom s audit committee as a result of her diligence cooper was named a person of the year by time and was featured on the magazine s cover in 2002 she is now an author consultant and internationally recognized speaker worldcom bankruptcythe company could no longer keep up once things started to unravel in fact worldcom had to adjust its earnings for the 10 year period from 1999 to 2002 by 11 billion dollars and the fraud was estimated to be in the neighborhood of 79 5 billion bankruptcy was the only option worldcom filed for chapter 11 bankruptcy on july 21 2002 only a month after its now former auditor arthur andersen had been founded guilty in court and lost its license to practice accounting by this time the company was indebted to its creditors by as much as 7 7 billion in its filing the company noted 107 billion in assets and 41 billion worth of debt the filing allowed worldcom to provide some restitution doing so allowed existing customers to continue receiving services worldcom was also able to pay its employees and keep its assets it also provided some much needed time to restructure even though it lost its luster within the corporate marketplace fallout and aftermathsome of the key personnel involved in the firm s accounting scandal received harsh punishment for their roles including debtor in possession financing from citigroup j p morgan and g e capital allowed the company to survive it emerged from bankruptcy in 2004 and rebranded itself as mci a telecom company worldcom acquired in 1997 verizon purchased mci and its assets in 2006 worldcom s former banks settled lawsuits with creditors for 6 billion without admitting liability around 5 billion went to the bondholders with the balance going to former shareholders in a settlement with the securities and exchange commission sec the newly formed mci agreed to pay shareholders and bondholders 500 million in cash and 10 million shares of mci this spate of corporate crime led to the sarbanes oxley act in july 2002 which strengthened disclosure requirements and the penalties for fraudulent accounting in the aftermath worldcom left a stain on the reputation of accounting firms investment banks and credit rating agencies that had never quite been removed who was to blame although no one actually admitted their part in the scandal there were several players who were at fault some within the company and others who weren t even employed by worldcom arthur andersen an accounting firm that audited worldcom s 2001 financial statements and reviewed worldcom s books for q1 2002 was found to have ignored memos from worldcom executives informing them that the company was inflating profits by improperly accounting for expenses key management personnel including worldcom ceo bernie ebbers and cfo scott sullivan the company s board of directors and its internal audit team were also singled out for their lack of oversight ignoring of accounting principles and committing fraud ebbers and his lawyer initially denied any involvement or knowledge of the fraud these claims were refuted by a wall street journal report which cited internal communications to the contrary wall street analyst jack grubman gave the company consistently high ratings even though the company along with other telecoms performed poorly grubman was fired from his job at salomon smith barney and was fined 15 million by the sec he was also banned from any activity in securities exchanges 