History of WorldCom - Essay Example

AR WorldCom 8/26 Table of Contents Contents Table of Contents 2 Contents 2 WorldCom 3 Introduction 3 Bibliography 8 WorldCom Introduction The history of WorldCom dates back to the year 1983 when Long Distance Discount Services was formed. It was in 1995 that this company became known as WorldCom. The company reached its peak when it merged with the MCI to form MCI WorldCom but later in 2000 the merger was dissolved and the name again changed back to WorldCom. Bernard Ebbers was the CEO of WorldCom and the company was considered to have an enormous rate of profitability until it was audited in 2002. It was in 2002 that the company got bankrupt because of unethical issues going on inside the organization. It is believed that these unethical issues were primarily not checked upon by anyone because the CEO of the company himself was involved in the fraudulent activities. These unethical issues and different management techniques recommended to improve the corporate governance of WorldCom would be outlined in this essay (Backover 2002; Crawford 2005). Unethical Issues faced by WorldCom There were three major problems with the corporate culture and their style of working. The first one was the way they grew through aggressive acquisition of companies, second was the strategy of senior executive loans and the third and foremost was the way in which they did business which was against the code of corporate governance and had exposed them to threats related to fair and arm’s lengths transactions (Kiron et al 2004; Securities and Exchange Commission 2003) Business Ethics form an important part of the culture of the businesses. They are very important when it comes to the normal functioning of businesses in this world. The company had made almost 65 acquisitions or mergers in only 6 years. Integrating is a lengthy process, time consuming and a very challenging exercise as there may be people who may resist these changes and create problems. The second aspect is to integrate financially by the use of the generally accepted accounting principles. It is believed generally that because of these practices of integration WorldCom was successfully able to hide its practices. The unethical issues in the company arose when the company started to face problems from the decreasing demand of telecommunications. It is then believed that the senior executives of the company were involved in fraudulent activities. (Kiron et al 2004; Worldcom Website 2010; Securities and Exchange Commission 2003) The unethical activities at WorldCom were such that the difference between moral good and bad was forgotten. Leaders are important when it comes to the ethics of a company (Mendonca 2001). But here at WorldCom the leaders only were the ones who perpetuated the fraudulent activities and this is because it got difficult to control the situation. It is analyzed that the senior executives of WorldCom such as the CEO Ebbers were personally devoted to financial success and because of this they started doing unethical activities at the company. It was because of the negative role of the senior executives that unethical practices flourished at WorldCom as they created such an organization culture which did not question anyone in the firm. Hence it can be said that fraudulent activities even at the lower designations was taking place at a higher rate. Hence it can be clearly identified here that inefficiency of the leader at WorldCom caused more of these ethical issues to arise (Kotter & Heskett 1992). The Company did not properly follow the accounting standards, while preparing the accounts to show that the profits were increasing but in fact they were not. This had led to increase profits by charging the expenses to decades instead of a few years, recognizing revenue in the same year and prove that the company had huge profits through acquisition. The company did not pay particular attention to the collection of receivables. The assumptions made regarding the bad debts were also kept lower and if the receivables are sold to third parties they are recorded as receivables available for sale but they did not do that. In 2000, the government ignored their acquisition of spirit, which struck the management and it was hard to maintain the share price which they were doing through the acquisitions. In 2002 they filled bankruptcy because of improper accounting and showing operating expenses as capital expense. (Kiron et al 2004; Worldcom Website 2010; Securities and Exchange Commission 2003) Bernie, the Managing director made a wrong move, he used to finance these purchases against the holdings, this created a problem when the holding value declined because he was asked for more collaterals to cover the margin calls, request a loan from the company or sell his shares. A $341 million loan was given to Ebbers; and is the largest loan ever given. This raised a question that whether it was ethical or not, to give such heavy loan to the executives which may give rise to conflict of interest or may result in breach of duty (Kiron et al 2004) It can be said that this was the most unethical decision taken by the company. The Security and Exchange Commission Report puts this decision in these words “We believe that the extension of these loans and guaranties was a 19-month sequence of terrible decisions-badly conceived, and antithetical to shareholder interests-and a major failure of corporate governance. Indeed, we do not understand how the Compensation Committee or the Board could have concluded that these loans were an acceptable use of more than $400 million of the shareholders money, (p. 32) The CEO’s desire for the company’s stock to be the #1 led the company to use of accounting practices that were not according to the generally acceptable accounting practices. The company showed that profits were increasing from one quarter to another but the profits did not increase. Operating expenses that are day to day running expenses were show as capital expenditure. MCI communication’s tangible assets were shown as wrongly devalued and intangibles were overvalued. This had led to the increase in the value of stocks of the organization; which was pledged by the CEO to buy other organizations. (Kiron et al 2004; Worldcom Website 2010). Challenges faced by WorldCom to resolve Ethical Dilemmas The Code of Ethics of the company was not designed in such a way that it could prevent all the workers from carrying out unethical tasks. This can clearly be witnessed in the Sec Report which stated that along with the senior executives of the company many of the financial employees of the company were also fired. Thus unethical issues were ranging from the lowest of the departments in WorldCom. All the unethical behaviours of the company could not be avoided because of the weak code of ethics of the company. The company was not following strict principles when it comes to code of Ethics. It is these code of ethics which help a business to excel further in monetary terms. It has been researched by Webey and Hamilton 2004 that firms which have a strict code of ethics have always beaten the firms which do not have code of ethics. The probable reason for such competitiveness is that with a strict policy on ethics the company can ensure that no fraudulent activity is going on in the company. Strict check on accounts is necessary which was not done in WorldCom and this brought a disaster for the company. Because the senior executives were involved in the unethical behaviour of WorldCom it almost became impossible to track the inner fraudulent activities. The activities of the executives were not counter checked until 2002 when the auditors checked the accounts of WorldCom. The shareholders and other members of the company had extra faith in the CEO of the company because of which they extended excessive loans to him. If the accounts of the company were checked properly by these shareholders and members such a situation could have been avoided (Wah 1999; Webey & Hamilton 2004). Proposed Ethical Change These fraudulent activities could have been avoided if certain steps were taken beforehand. Concepts of ethics are necessary for a firm to introduce so that frauds do not take place. Broader concepts in the line of accounting have been mentioned in the code of ethics and some of them are outlined below. Accrual concept is used to measure the real performance of the organization by matching the revenues to the expenses that is used to combine the actual cash inflows and outflows to the expected cash inflows and outflows. An accountant should only book accrual for example when it is certain that a transaction took place and the company will certainly receive something in respect of the transaction made. If the accountant is forced to record a wrong transaction, he should give a hint that this thing is wrong then if nothing happens; formally talk to him. Even then he is forced to do that he should take legal advice; otherwise he will be considered as being a part of it. I as the CEO of the company would recommend such an approach to be followed by the company so that unethical issues from the company can be completely eradicated. (Badawi 2005; Kiron et al 2004). Whistle blowing means standing up against the fraudulent or misleading activities in the organization or by a group of people. Whistle blowing may have certain problems; sometimes the whistle blower may not be reasonable, they may be doing all this because of a personal resent. The whistle blower can leak confidential information that may breach his duty of confidentiality. The whistle blower should always confirm that the news is true. The advantages of whistle blowing are that the person fulfills its moral and social responsibility. Make the senior management aware of the things that are going on. This whistle blowing would also be encouraged by me as a CEO so some of my loyal workers can stand up for the company and inform us about any wrongdoing in the company. This can help to enhance the code of ethics of the company. Such strategies can be used in the newly created MCI to avoid any such disaster in the future (Wah 1999; Kotter & Heskett 1992). Conclusion During the recent decade corporate fraudulent financial reporting frauds are conducted by the organization that are listed on stock exchange and are involved in international trading. These fraudulent activities have led to reforms in financial reporting and corporate governance by government, auditing and accounting bodies to increase investments in global capital markets. Moreover after bankruptcy it is seen that MCI is also implementing new standards which are related to the concept of ethics in the company. It is recommended for MCI that they further strengthen their code of ethics so that in future such issues of corporate governance can be avoided. (Kiron et al 2004; Kotter & Heskett 1992). Bibliography WorldCom website, (www.worldcom.com/global/about/facts/) Accessed on 26 August 2010 Top of Form Kiron, D., Harvard University., & Kaplan, R. S. (2004).Accounting Fraud at WorldCom. Boston, MA: Harvard Business School. Global corporate accounting frauds and action for reforms. Ibrahim M Badawi. 2005. Review of Business. Backover, A. (2002, November 5). Report slams culture at WorldCom: Findings could help prosecutors case. USA Today, Ib. Crawford, K. (2005, March 15). Ex-WorldCom CEO Ebbers guilty: Faces up to 85years in prison after being convicted on all nine counts in accounting fraud. Retrieved August 26, 2010, fromhttp://monev.cnn.eom/2005/03/l5/news/newsmakers/ebbers/index.htm?cnn=yes Kotter, J. P., & Heskett, J. L. (1992). Corporate culture and performance. New York: Free Press. Mendonca, M. (2001). Preparing for ethical leadership in organizations. Canadian Journal of Administrative Sciences, 18(4), 266-276. Securities and Exchange Commission (2003). Report of investigation by the special investigative committee of the board of directors of WorldCom, Inc. Washington, DC. Wah, L. (1999, July-August). Ethics linked to financial performance. Management Review, 7. Webley, S., & Hamilton, K. (2004, July). How does business ethics pay. Retrieved August 26 2010, from http://www.ibe.org.uk/ Read More