The Corporate Giant WorldCom - Essay Example

The Corporate Giant WorldCom Introduction The fall of the corporate giant WorldCom was inevitable in every sense because it neither followed reasonable market oriented objectives nor complied with legal and ethical norms. The telecommunication boom in the 1990s lured the company managers to shift its strategy from maintaining market share to becoming a prominent stock. The unexpected recession and dot-com collapse spoiled the expectations of the company as the industry as a whole plunged into great loss. As the E/R ratio imbalance kept increasing, the managers sought to cook the books so as to prevent investors and government from getting the consistent results. 1. Case Summary WorldCom, the Nation’s second largest long distance Telecommunications Company filed for bankruptcy protection on July 21st 2002 revealing that it had overstated earnings in 2001 and the first quarter of 2002 by more than $3.8 billion. Further on August 8th of the same year the company again admitted that it had maneuvered its reserve accounts also affecting another 3.8billion. Substantial accounting fraud was charged against the firm by the US Securities and Exchange Commission. The actual cause of the corporate failure lies with the enormous oversupply that could be attributed to excessively optimistic projections of Internet growth. Evidently, the company’s projections on expense-revenue ratio flawed as “the industry conditions began to deteriorate in 2000 due to heightened competition, overcapacity, and the reduced demand for telecommunications services at the onset of the economic recession” (Kaplan & Kiron, 2007). Subsequently, the stock market value of the firms in the telecommunication industry plunged and people at the WorldCom’s helm of affairs intervened in the accounting practices to conceal the actual trouble from public. In short, what they did was that they transferred a considerable part of current expense to a capital account as the capitalized cost would normally be considered as investment. 2. What were the pressures that led executives and managers to “cook the books?” Evidently the company struggled to maintain its E/R ratio since the first quarter of 2000 ‘while facing revenue and pricing pressures and its high committed line costs’ (Kaplan & Kiron, 2007). WorldCom had to spend beyond its capacity due to unnecessary acquisitions of other firms. In order to overweigh the short term loss, managers were asked to spend exceedingly so as to raise immediate revenue. There was incessant pressure from the top. For instance, CFO Sullivan directly insisted Myers and Yates to carry out his plans. And on the bottom line, individuals like Betty were forced to partake in accrual releases and capitalization of line costs. These were the situations in brief that made executives and managers to “cook the books. 3. Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom? The company officials could qualify a considerable amount of costs as investment in 2001 and the first quarter of 2002, and this could have allowed the company to spread the costs to subsequent years if Cooper had not come across the issue. Obviously, the incident indicates the prevailing pitfall in the US corporate governance. Evidently, audit firms have to make strategic amendments to their processes and procedures to detect frauds and errors in the account books of the client on time. WorldCom was indirectly supported by the Andersen accounting firm, who ignored the fact that the organization’s practices were apparently unethical. Only government can safeguard the interests of its citizens against unscrupulous business practices. Likewise, various service institutions particularly that of banking and accounting must keep themselves reliable and sustainable to prevent this kind of fraud in future. 4. Were the external auditors and board of directors blameworthy in this case? Why or why not? Although CFO Sullivan is the main protagonist in the WorldCom case, he alone cannot be blamed for the scandal, because there were many others in the firm who aware of the discrepancies and could have either prevented the fraud or informed the authorities about the issue on time. Other than Sullivan, individuals like the comptroller Myers, external auditor Anderson, accounting director Yates, accounting managers Betty Vinson and Troy Normand, and CEO Bernard Ebbers are blameworthy in this case. Although some of them would have their own legal justifications, from an ethical perspective, all who had been aware of the scam have ethically erred. Anderson, the external auditor is blameworthy. He could not have the ability to detect the flaws as he had been following very conventional methods of risk assessment. Moreover, he wanted to find WorldCom profitable for his own long term sustainability. 5. Betty Vinson: victim or villain? Should criminal fraud charges have been brought against her? How should employees react when ordered by their employer to do something they do not believe in or feel uncomfortable doing? Betty Vinson is a victim in this case as she was placed in an unsafe position by the superiors while carrying out their accounting fraud. She would have lost her job if she had resisted the fraud. Moreover, she was convinced that the fraud would be temporary adjustment to bring things under control. On the other hand, Betty is a villain too, for she had the freedom to keep herself away from the fraud if she took better ethical decision in the beginning itself regardless of the issues related to her job security. But Betty did not comply with the legal as well as the ethical norms. As a responsible employ, she would not have concealed the fraud from others. Evidently, she would be justified by the law if she revealed the fraud to the officials. What Cooper did in this regard was reasonable, and the same would have been done by Betty too. Therefore, from a legal perspective, Betty Vinson also would be punished, perhaps in a less intensive way as compared to other main perpetrators. 6. What are one or two enduring lessons from this case that managers and leaders should come away with? The WorldCom case gives certain enduring lessons to managers and leaders of modern organizations. Firstly, managers and leaders must maintain an ethical approach in every aspect of business affairs so that their subordinates will also be motivated to take ethical stance and create an appropriate organizational behavior. The case is an example that failure to do the right thing can cause numerous adverse effects on the organization as well as on the individuals’ personal life. Secondly, WorldCom case tells all managers not to manage firms sacrificing their company’s long-term prospects in the business process for short-term gains. To be more specific, ethics must be embedded in an organization’s all activities including but not limited to decision making processes, business strategy, and corporate governance. Conclusion In short, the WorldCom case involves multiple fraudulent activities. The company performed accounting frauds to prevent its stock falling. It also committed fraud by capitalizing the current expenses. The CEO Ebbers acquired huge corporate loans by utilizing the company unethically. Finally, the company lacked an effective internal as well as external auditing mechanism or corporate culture that could prevent the accounting fraud. The incident altogether points to the need of improved regulations. References Kaplan, R & Kiron, D. (2007). Accounting Fraud at WorldCom. Harvard Business School. Read More