Responses by the Federal Communications Commission to WorldCom's Accounting Fraud

By Lavey, Warren G. | Federal Communications Law Journal, June 2006 | Go to article overview

Responses by the Federal Communications Commission to WorldCom's Accounting Fraud


Lavey, Warren G., Federal Communications Law Journal


WorldCom's disclosure of billions of dollars of financial fraud on June 25, 2002 challenged the Federal Communications Commission ("FCC") in several major ways. The FCC proclaimed its commitment to enforce its rules to protect consumers against service discontinuance as well as the priority of rooting out corporate fraud. The FCC's rules required WorldCom to file accurate financial information and to show that it had financial and character qualifications necessary to hold FCC licenses. Despite numerous related proceedings and other actions in 2001 and early 2002, the FCC had not detected nor deterred WorldCom's fraud. After the disclosure, WorldCom continued its landline and other core services. Although there were allegations that WorldCom violated the FCC's rules by filing false financial information, the FCC did not take enforcement action against WorldCom and did not tighten its regulations related to such financial fraud. This article will examine the reasons for the FCC's regulatory treatment of WorldCom, its failure to prevent the WorldCom debacle, and the absence of any shift in its regulatory posture in the WorldCom aftermath. Four partial explanations for the FCC's responses involve the actions of the Securities and Exchange Commission and Justice Department, downturn in the telecommunications industry, long-range deregulation by the FCC, and political accountability.

  I. INTRODUCTION
 II. HOW DID Tim FCC RESPOND IN THE DAYS AND WEEKS
     FOLLOWING WORLDCOM'S DISCLOSURE?
     A. WorldCom's Disclosure of Accounting Fraud.
     B. FCC's Public Statements Responding to WorldCom's
        Disclosures
     C. Analysis of the FCC's Immediate Response
III. WHAT REGULATIONS DID THE FCC APPLY OR NOT APPLY TO
     WORLDCOM DURING THE ACCOUNTING FRAUD?
     A. Findings of Financial and Character Qualifications for
        WorldCom's Licenses
        1. Legal Framework for the FCC's Analysis of
           WorldCom's Qualifications
        2. Application of Financial and Character Qualifications
           Tests to WorldCom During the Fraud
     B. Assessment of WorldCom as a Financially Strong
        Competitor in Authorizing Other Carriers
     C. Audit of and Reports by WorldCom
     D. Statistical Reports Reflecting WorldCom ' s Financials
     E. Enforcement Action
     F. Regulations of Prices, Terms, and Conditions for Services
        Offered by Local Exchange Carriers
     G. Analysis of the FCC's Relevant Regulations During the
        WorldCom Accounting Fraud
 IV. AFTER SEVERAL YEARS, HOW DID THE FCC CHANGE OR NOT
     CHANGE ITS REGULATIONS RELATED TO WORLDCOM'S
     DISCLOSURE?
     A. FCC Proceedings Triggered by WorldCom' s Disclosure
        1. Discontinuance of Some Noncom Services
        2. WorldCom's Licenses
        3. Local Exchange Carriers' Protection Against
           Uncollectibles
     B. Continuation of Other FCC Regulations Related to
        WorldCom' s Disclosure
        1. Information Filing and Accounting Requirements for
           Nondominant Carriers
        2. License Applications
        3. Audits
        4. Enforcement Actions
        C. Analysis of the FCC's Maintenance of its Regulations and
           Practices Following its Public Statements on WorldCom's
           Disclosure
  V.  WHAT EXPLAINS THE FCC'S RESPONSE TO WORLDCOM'S
      DISCLOSURE?
      A. Protecting Consumers and Rooting Out Corporate Fraud
      B. Partial Explanations for the FCC's Stance on Financial
         Fraud
         1. Changes in Securities Laws, SEC Regulations, and
            Other SEC and Justice Department Actions
         2. Telecommunications Industry Downturn
         3. Deregulation and Market Forces
         4. Political Accountability
 VI. CONCLUSION

I. INTRODUCTION

The disclosure of massive financial accounting fraud at WorldCom, Incorporated ("WorldCom") on June 25, 2002, (1) was a major shock to the Federal Communications Commission ("Fee"). …

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