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
Capital expenditures as well as the $500 million in undocumented computer books. expenses.
Another $2 billion in questionable entries The SEC was suspicious
Admitted to inflating its profits by $3.8 because while billion over the previous five quarters. WorldCom was making so much profit, AT&T was losing money.
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
Imp m act of F of raud 25 YEARS 5 YEARS 5 YEAR 1 YEAR 1 YEAR 5 MONTHS 3 YEARS (pro)
Why ‘good’ managers make bad ethical choices 10 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 11 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”.
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.
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.)