CASE STUDY SECTION C GROUP 1

Business Ethics Accounting Fraud at WorldCom:

A case study

What is/ are the Business Ethics Issues in this Case?

How did they reach here? Who was/were/are responsible? When did it occur? When did it come to light? Which of the Ethics Principles

compromised/flouted? Where do we go from here?

Solutions?

Overview

WorldCom Inc. began as a small Mississippi provider of long distance telephone service called LDDS.

1996: Acquired MFS Communications (internet backbone)

1998: Acquired MCI 2000: Failed merger with Sprint 2000: Dotcom Bubble Burst (rapid decline in

telecom stock values) 2002: Accounting Fraud uncovered 2002: Filed for Bankruptcy Protection

The Key Players

Source: IIT Kharaghpur

What Happened?

From 1998-2000, WorldCom reduced reserve accounts held to cover liabilities of acquired companies WorldCom added $2.8 billion to the revenue line from

these reserves Reserves didn’t cut it; An e-mail was sent in

December 2000 to a division in Texas directing misclassification of expenses.

CFO told key staff members to mark operating costs as long-term investments to the tune of $3.85 billion.

Huge losses turned into enormous profits. $1.38 billion in net income in 2001

Inflated the company’s value in its assets

The whistleblower sent tips to the internal audit team

Accounting irregularities were spotted in MCI's books.

The SEC was suspicious because while WorldCom was making so much profit, AT&T was losing money.

Capital expenditures as well as the $500 million in undocumented computer expenses.

Another $2 billion in questionable entries

Admitted to inflating its profits by $3.8 billion over the previous five quarters.

Why it Happened?

Corporate Culture Autocratic style of management and followed a top down

approach. Ebbers was obsessed with revenue growth and insisted on

a 42% E/R ratio. Lack of courage of employees to communicate the

fraudulent activates – believed it would have cost them their jobs

A financial system in which controls were extremely deficient

The BOD and Audit Committee did not appear to have had an adequate understanding of the company and culture

Inadequate audits by independent auditors

Impact of Fraud

25 YEARS5 YEARS

1 YEAR

1 YEAR5 MONTHS

3 YEARS (pro)

Why ‘good’ managers make bad ethical choices

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Four Rationalizations To Justify Questionable Conduct

1) Belief that the activity is not “really” illegal.

2) Belief that it is in the individual’s or corporation’s best interest.

3) Belief that it will never be found out.

4) Belief that the company will condone actions that are taken in its interest and will even protect the managers responsible.

Key Take Aways

History repeats itself. Be aware of your environment. If it seems too good to be

true, it probably is. No job is worth breaking the law

or committing unethical acts for. Your personal integrity is your most

important asset – you own it and control it.

“Trust, but Verify”.

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Ethical Values Violated

Unethical Work Culture Pressurising employees to manipulate

accounts No productive outlet for employee

dissent Employees who played along were

rewarded; others were threatened. Fudged up the accounts; mislead the

various stakeholders

Corporate Whistleblowing

Cynthia Cooper and her team were the first people who uncovered the major fraud at Worldcom.

The voluntary release of non-public information, as a moral protest, by a member or former member of an organization outside the normal channels of communication to an appropriate audience about illegal and/or immoral conduct in the organization or conduct in the organization that is opposed in some significant way to the public interest.

Traditional corporate monitoring occurs through a variety of overlapping means, including: the company’s board of directors, external auditors and attorneys, and the government.

“The highest good was the good will. To act from a good will is to act form duty. Thus, it is the intention behind an action rather than its consequences that make that action good” – Immanuel Kant.

As businesses continue to grow larger and more complex, whistleblowing has emerged as a valuable tool for eliminating future corporate fraud.

A reported 90 per cent of whistleblowers lose their jobs or are demoted.

What the Group Recommends Inculcation of ethical values into the work

culture Embracing a bottom top approach Stringent auditing, both internal and external,

procedures Divesting control in a larger number of hands Comparing companies in the same industry

and sector based on performance indicators Keeping various stakeholders’ interests in

mind.

Bibliography

Kaplan, R. S., and Kiron., D. (2007) Accounting Fraud at WorldCom. Harvard Business School Case 104-071, September 2007. (Revised from original April 2004 version.)

Lyke, B. (2002). “WorldCom: The Accounting Scandal.” CRS Report for Congress, August 2002.http://www.law.umaryland.edu/marshall/crsreports/crsdocuments/RS21253_08292002.pdf

Romar, E., and Calkins, M. (2006) WorldCom Case Study Update. University o Massachusetts-Boston http://www.scu.edu/ethics/dialogue/candc/cases/worldcom-update.html

American Institute of Certified Public Accountants (2005) The Worldcom Fraud http://www.aicpa.org/InterestAreas/AccountingEducation/Resources/DownloadableDocuments/worldcom.ppt

WorldCom: The Case Against Bernard Ebbers (2011)https://www.youtube.com/watch?v=DW03eVMtOY4

WorldCom – What Went Wrong (2008)https://www.youtube.com/watch?v=7g_d-phoUrU

Bibliography

Bernard Ebbers Photo : http://www.time.com/time/specials/packages/article/0,28804,1903155_1903156_1903277,00.html

Scott Sullivan Photo: http://www.guardian.co.uk/pictures/image/0,,-1070329609307,00.html

Buford Yates Photo:

http://news.bbc.co.uk/2/hi/business/2307845.stm David Myers: http://www.bloomberg.com/news/2012-06-21/obama-

stimulus-aids-worldcom-felon-with-health-care-loan.html Betty Vinson Photo:

http://www.deseretnews.com/article/600153804/2-workers-sentenced-in-WorldCom-scandal.html?pg=all

Troy Normand Photo: http://www.deseretnews.com/article/600153804/2-workers-sentenced-in-WorldCom-scandal.html?pg=all

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