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WorldCom is a major global communications provider, operating in more than 65 countries. WorldCom provides data transmission and Internet services for businesses, and, through its MCI unit, provides telecommunications services for businesses and consumers. WorldCom became an important player in the telecommunications industry in the 1990s. However, as the economy cooled in 2001, WorldCom's earnings and profits similarly declined, making it difficult to keep WorldCom's earnings in line with expectations by industry analysts.

WorldCom had an aggressive acquisition strategy, evolved into the second-largest long distance telephone company in the United States and one of the largest companies handling worldwide Internet data traffic. WorldCom achieved its position as a significant player in the telecommunications industry through the successful completion of 65 acquisitions. Between 1991 and 1997, WorldCom spent almost $60 billion in the acquisition of many of these companies and accumulated $41 billion in debt, but by 1997, WorldCom's stock had raised from pennies per share to over $60 a share. Journalists thought that the company was a pure success and made recommendations to invest in it.

Because of all the acquisitions the company failed to coordinate all new features of the business. Customer service deteriorated, computer systems deteriorated, local systems failed to work properly, systems could not work together, to the point that not even the billing systems could not work properly anymore.

The market in the 2000 period was bad in general, and a lot of companies in the industry were disappearing from the market, especially with the developments in mobile telephone services that most companies and WorldCom as well, did not provide.

Starting at least in 2001, WorldCom engaged in an improper accounting scheme intended to manipulate its earnings to keep them in line with Wall Street's expectations, and to support WorldCom's stock price. The accounting misstatement lasted from 2001 to the first quarter of 2002.

Before the scandal

Below is an extract from the financial data from 1997 to 2001. The data is the one before the fraud was detected.

1997 1998 1999 2000 2001

Revenues 7384 17678 35908 39090 35179

Operating Income 1018 -975 7888 8153 3514

Total Assets 23596 86401 91072 98903 103914

Operating Margin* 13.78% -5.51% 21.96% 20.85% 9.98%

*The operating margin is a percentage indicator that shows the profitability of the company.

It is obvious even for the untrained eye that something happened in 1998 that led to such a bad outcome. But the recovery from 1999 to 2000 is even more surprising. The company used accounting manipulation to hide the difficulties in the business. The recession leads to a decrease in revenues that WorldCom hide in order to meet the stock expectations.

After the scandal

The next table contains data extracted from the consolidated financial statements from 1999 to 2001:

1999 2000 2001

Revenues 35908 39090 35179

Net income 2294 2608 1407

RESTATED Net income 2085 -649 -1975

Total Assets 91072 98903 103914

Long-term Debt 17209 177696 30038

Shareholder Funds 51238 55409 57930

Intangible Assets of Total Assets 48% 47% 52%

Manipulations of financial data started in 1999 right after the bad outcome from 1998 with the scope to boost the stock market price. The accounting techniques used were:

i) Recognize revenues expenditure as capital expenditure.