WorldCom's reported profits

WorldCom's reported profits
	FALSE
	"WorldCom, the second-largest long-distance telephone company in the United States, remained profitable through 2001 and early 2002 despite the downturn in the telecommunications industry."
Domain	Business, Finance & Scams
Tactic	Fraud or Scam; Statistical & Evidentiary Distortion;
Era	Historical
First seen	2000
Origin	WorldCom's quarterly and annual financial statements, 1999–2002
Last reviewed	2026-10-26
	Further reading: books on Business, Finance & Scams

WorldCom's reported profits concealed one of the largest accounting frauds in history. Between 1999 and 2002, WorldCom, a telecommunications giant built through dozens of acquisitions, inflated its reported earnings by about $11 billion, mainly by recording ordinary operating expenses as long-term capital investments. The fraud was uncovered in 2002 by the company's own internal auditors, led by Cynthia Cooper. WorldCom filed for bankruptcy in July 2002, surpassing Enron as the largest bankruptcy in US history at the time. Its chief executive, Bernard Ebbers, was later sentenced to 25 years in prison. Coming months after Enron, the scandal convinced Congress to pass the Sarbanes-Oxley Act.

The claim

WorldCom grew rapidly in the 1990s under Ebbers, a former basketball coach and motel owner from Mississippi. Through more than sixty acquisitions, including the purchase of MCI Communications for about $37 billion in 1998, it became the second-largest long-distance carrier in the United States and a major carrier of internet traffic. As the dot-com bubble burst and the telecommunications industry entered a severe downturn in 2000 and 2001, WorldCom continued to report profits and to meet Wall Street's expectations while competitors struggled.

Origin

WorldCom's business model depended on continued growth, and its share price, which supported further acquisitions, depended on meeting earnings targets. When the industry slowed and a proposed merger with Sprint was blocked by regulators in 2000, the company could no longer grow by acquisition. Ebbers had also borrowed heavily against his WorldCom shares and received loans from the company totaling about $400 million, giving him a strong personal interest in keeping the share price high.

To hit their targets, chief financial officer Scott Sullivan and controller David Myers directed staff to make accounting entries that turned expenses into apparent profits.

What the evidence shows

The fraud relied on two main techniques:

Capitalizing line costs. WorldCom paid other telephone companies fees, known as line costs, to carry its calls over their networks. These were ordinary operating expenses that should have been deducted from revenue in the period in which they were incurred. Instead, beginning in 2001, WorldCom recorded billions of dollars of line costs as capital expenditures, as if they were investments in long-term assets. This removed the expenses from the income statement and spread them over many years, turning losses into profits.
Releasing reserves. Earlier, in 1999 and 2000, the company reduced reserves it had set aside for future costs and recorded the released amounts as income, boosting reported earnings.

In 2002 Cynthia Cooper, WorldCom's vice president of internal audit, and her team began examining capital expenditure records after a manager raised concerns. Working partly at night to avoid detection, they found billions of dollars of unsupported entries that moved line costs into capital accounts. Sullivan asked Cooper to delay her work. She instead reported her findings to the head of the board's audit committee.

On June 25, 2002, WorldCom announced that it had improperly accounted for about $3.8 billion in expenses. Further investigation raised the total to about $11 billion. The company's auditor, Arthur Andersen, which was already collapsing because of the Enron scandal, had not detected the fraud.

WorldCom filed for bankruptcy on July 21, 2002, with more than $100 billion in assets. Shareholders lost about $180 billion in market value from the company's peak, and tens of thousands of employees lost their jobs.

In 2005 a jury convicted Ebbers of fraud, conspiracy and filing false documents with regulators. He was sentenced to 25 years in prison and was released early on health grounds in 2019, shortly before his death. Sullivan, who testified against Ebbers, was sentenced to five years. Myers and several accounting staff also pleaded guilty.

WorldCom emerged from bankruptcy in 2004 under the name MCI and was acquired by Verizon in 2006. The company paid a $750 million penalty to settle SEC charges, and former directors agreed to pay millions of dollars personally to settle shareholder lawsuits.

Consequences

The WorldCom scandal, following Enron, persuaded Congress that corporate accounting needed reform. The Sarbanes-Oxley Act of 2002 required chief executives and chief financial officers to certify their companies' financial statements personally, strengthened requirements for internal controls, increased penalties for fraud and created a board to regulate auditors. In December 2002 Time magazine named Cynthia Cooper, along with Enron's Sherron Watkins and FBI agent Coleen Rowley, as its Persons of the Year, honoring them as whistleblowers.

Why it persists

WorldCom is a classic case of fraud under pressure:

Pressure to meet expectations. When real growth stopped, executives turned to accounting to maintain appearances.
Simple techniques, large effects. The fraud did not require sophisticated financial engineering. It relied on misclassifying ordinary expenses.
Personal stakes. Ebbers's personal debts tied to the share price created powerful incentives.
Internal controls matter. The fraud was uncovered not by outside auditors or regulators but by internal auditors willing to persist.

Lessons for readers

Be wary of a company that keeps reporting strong profits while its whole industry struggles.
Large, sudden increases in capital spending can hide expenses.
Look at cash flow as well as reported earnings. Accounting profits can be manipulated more easily than cash.
Leaders with large personal financial exposure to the share price may have incentives to distort results.
Whistleblowers inside organizations are often the most effective defense against fraud.

Sources

Cynthia Cooper, Extraordinary Circumstances: The Journey of a Corporate Whistleblower (Wiley, 2008).
Dennis R. Beresford, Nicholas deB. Katzenbach and C. B. Rogers Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of WorldCom, Inc. (2003).
Richard C. Breeden, Restoring Trust: Report to the Hon. Jed S. Rakoff on Corporate Governance for the Future of MCI, Inc. (2003).
US Securities and Exchange Commission, litigation releases concerning WorldCom, 2002–2003.
"Persons of the Year: The Whistleblowers," Time, December 30, 2002.