What do we know about the financial consequences of the WorldCom accounting scandal?

Abstract

At which point does a fraud become a scandal and where can one draw the line? Which extent and effects can a fraud have? Using the example of the WorldCom scandal in 2002, these questions will be addressed and further investigated. This paper deals with the economic and social consequences of such a fraud case and approaches the effects to the present day. Using economic theories and practical examples, the extent will be explained in detail. The fraud is rooted in the organizational misbehavior which was caused, on the one hand, by the wrong decisions based on the personal interest of the top managers and, on the other hand, revenue-seeking Wall Street analysts giving intentionally wrong information. During the 1990s, MCI WorldCom bought-up many competitive companies, which led to a significant increase in its reported revenues. To carry on this fast-paced development, the company distorted its balance sheet by capitalizing on line costs and releasing accruals while booking them as expenses, not as expenditures. Finally, as the fraud was disclosed by the internal audit in 2002, the stock price fell immediately from almost $65 to below $1 a share.