WorldCom Announces $3.8 Billion Accounting Fraud Discovery

On June 25, 2002, WorldCom, the second-largest telecommunications company in the United States, announced it would restate its financial statements after discovering $3.8 billion in fraudulent accounting entries. The company admitted that “certain transfers” from line cost expenses to asset accounts violated generally accepted accounting principles (GAAP), representing the largest accounting fraud in American history at that time.

The fraud was discovered by WorldCom’s internal audit unit under Vice President Cynthia Cooper, who identified the massive fraudulent balance sheet entries despite facing intense pressure from senior management. Between 1999 and 2002, CEO Bernard Ebbers and other executives engaged in systematic accounting fraud to inflate earnings and maintain WorldCom’s stock price, deceiving investors and analysts.

The SEC filed civil fraud charges against WorldCom on June 26, one day after the announcement, alleging the company had engaged in “a concerted effort to manipulate earnings to meet Wall Street targets and support its stock price.” Subsequent investigations would reveal that WorldCom had overstated its assets by over $11 billion, making it the largest accounting fraud in U.S. history.

On June 28, just three days after the disclosure, WorldCom fired 17,000 employees in a desperate attempt to cut costs. Three weeks later, on July 21, the company filed for bankruptcy protection with $107 billion in assets—the largest bankruptcy in American history at that time. The WorldCom scandal, following closely on Enron’s collapse, demonstrated that corporate accounting fraud was systemic rather than isolated, triggering congressional action that would produce the Sarbanes-Oxley Act within 35 days.