WorldCom hid $3.8B in expenses to fake profits — the biggest US fraud of its era

In the late 1990s, WorldCom was the second-largest long-distance telephone company in the United States, and its founder and CEO, Bernard Ebbers, was a celebrated figure. But as the telecom market soured after 2000, WorldCom's results came under pressure. To keep earnings and the stock price looking healthy, senior executives engaged in a massive accounting fraud: they booked ordinary operating costs (the fees WorldCom paid to use other companies' networks) as long-term capital investments, which made expenses disappear from the income statement and profits look larger than they were.

The fraud was uncovered from the inside. In 2002, an internal audit team led by Vice President Cynthia Cooper began digging into the company's books, over the resistance of senior finance managers. They found more than $3.8 billion in fraudulent accounting entries — and later investigations showed that WorldCom had overstated its assets by more than $11 billion in total, making it the largest accounting fraud in American history at the time.

The collapse was swift. WorldCom filed for bankruptcy in July 2002, then the largest bankruptcy in US history, wiping out shareholders and tens of thousands of jobs. CEO Bernard Ebbers was convicted of fraud and conspiracy and sentenced to 25 years in prison in 2005 (he died in 2020). Along with Enron, the WorldCom scandal shattered confidence in corporate America and helped drive the passage of the Sarbanes-Oxley Act, which overhauled financial reporting and auditing.