The Fraud Triangle: Bernie Ebbers and Scott Sullivan during the Worldcom Saga - Case Study Example

Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: The Fraud Triangle: Bernie Ebbers and Scott Sullivanduring The Worldcom Saga Introduction The fraud triangle incorporates three elements that cause people to commit occupational fraud. The three elements are perceived pressure, perceived opportunity and rationalization.The fraud scale includes personal integrity in the model which is the ethical code of behavior adopted by each person. According to the events that transpired in WorldCom which according to history is the biggest financial scandal, the fraud triangle and scale have been employed to analyze the scandal (Littman, 2010). Pressures Pressures in the fraud triangle refer to the motivation that leads a person to do fraudulent things. Such motivation ranges from financial, lifestyle, or emotional. There are a number of pressures eliciting from the case that forced the then WorldCom Chief Executive officer, Bernie Ebbers and the Chief Finance Officer, Scott Sullivan to engage in financial fraudulent activities (Valentin Dijksman and Chiche, 2000). As a consequence of high expectations of Wall Street and general decline of the economy, Ebbers was faced with managerial strain. He knew that the catalysts for growth of the telecom were mergers and acquisition which would be influenced by a firm investment portfolio and well performing WorldCom shares. Scott advised Ebbers to issue an earnings warning following the worsening of WorldCom’s operating and financial performance during the month of September 2000. However, Ebbers strongly rejected the advice and instead they both conspicuously agreed to hide the real nature of the company’s financial statements (Valentin, Dijksman and Chiche, 2000).The company’s top management’s salaries and bonus compensations were based on the overall growth and success of the company which was primarily determined by the level of revenues. Hence, the top management had to report impressive financial performance inform of revenues and profits so that they can earn more bonuses. For instance in 1999, Ebbers earned bonuses amounting to 7.5million US dollars while Scott earned 2.67 million US dollars. This was apparently a great motivation for top management to commit fraud. Following a decrease in the rate of growth of WorldCom in July 2000, there was intense pressure to prevent the price of the telecom’s shares from decline so as to meet and exceed the analyst’s estimates of the company’s expected performance. Additionally, due to personal pressures, Ebbers pledged his personal holdings in the company stock as collateral to collateral for loans to purchase his own interests. There was imminent pressure to win the employees’ loyalty for continued commitment to offer services to the company (Pavlo and Weinberg, 2007). Hence, Ebbers and Scott would collaborate with the human resource department to give hefty compensation grants which were not within the companies laid down procedures and guidelines for remuneration and compensations to employees. These favors were meant to influence the employees to enforce and put into action whichever orders and instructions came from the top management, without subjecting them to critique and observing professional ethics while executing their organizational duties. Thus the employees had to pay loyalty for loyalty to the top management so that they could continue receiving those favors. This undoubtedly contributed to a large extent to the development of a corporate culture that lacked a prescribed code of conduct to be adhered to within the organization. Due to his greed, emotional pressure influenced Ebbers to use his powers as the WorldCom chief executive officer to acquire a personal loan of 341 billion US dollars, which according to history, is the largest loan ever given by a public company to its CEO. He did this by intimidating and pressuring employees. He went ahead to employ the Chief Financial Officer Scott Sullivan to dishonestly raise the stocks of WorldCom to make the telecom look more attractive than its real performance. He coerced Scott to misrepresent the line costs in the balanced sheet which according to the generally accepted accounting principles ought to have been recorded as expenses in the income statement. As a result, this was gross misconduct of the top management to engage in these fraudulent actions and they were entirely responsible for the downfall of the giant company in the telecom industry. Perceived opportunity An opportunity refers to the situation or condition that enables someone to commit and conceal fraudulent acts and be able to convert the misrepresentation to obtain personal benefits out of the situation. With reference to the WorldCom scandal, the opportunity to commit fraud was presented by the lack of an adequate internal control structure in the company, the accounting system and control procedures. The company’s management had failed to create an environment that would enable the creation of an efficient control system.Such internal control structures include supervision, segregation of duties and technological controls.The control system would guide the company in meeting the stipulated financial regulations and mitigating fraudulent activities by the top management.There was active participation of Ebbers and Scott who would have incapacitated the effective internal control system even if it were there. The fear by employees of their jobs’ stability and steady income made them bow to the pressures and intimidations by the management hence creating a good opportunity for CEO and CFO to commit fraud without questioning the top managers. Due to autocratic form of management which was led by the famous CEO Bernie Ebbers and CFO Scott Sullivan, a corporate culture was developed whereby the top management could not be criticized by the employees(Valentin Dijksman and Chiche, 2000).Suvillan would influence the general managers in the accounting department to authorize transactions without proper document to support those transactions. Had there been a corporate culture that instilled proper corporate culture that instilled the right ethical behavior to the management and employees, perhaps Scott Suvillan would not have nodded to the idea of Bernie Ebbers to manipulate financial statements and thereby the fraud would not have occurred. During the rapid growth of WorldCom, Scott and Ebbers led the company through rapid acquisitions and mergers that would not give time and chance for the firm to develop and implement a control system to monitor the financial transactions (Leidesdorff, 1998). Apparently, opportunities to commit fraud enable the fraudsters to redirect the dirty deals into personal benefits so that they can accumulate and increase their wealth. In the WorldCom case, Scott and Ebbers were able to earn huge bonuses due to the exaggerated financial performance of the company by manipulating its financial statements. This enabled Ebbers to satisfy his personal stock purchases by keeping the stock prices relatively high. Scott was as well enabled to complete the purchase of his Boca Raton mansion. However, after the fraudulent deals were eventually discovered, all the fortune was completely lost and the perpetuators brought to book. Rationalization Rationalization is the last stage in the fraud triangle that involves the justification of by the fraudsters of their fraudulent actions. In the case of WorldCom, the perpetuators of fraud are first time wrongdoers who have no track record of criminal acts and hence they use rationalization to conceal their unjust dishonest deeds. The top management including the CEO Bernie Ebbers and CFO Scott Sullivan pressurized the company’s employees to record false journal entries to tint a false image of the company so that they could attract investors and retain them. They thought that the misrepresentation of the financial information about the performance of the company would be a onetime act that would be rectified in the near future following their expectations of huge profits. They believed that their fraudulent acts would not harm the company or the stakeholders and did not expect that they would result to tremendous consequences on them. They enjoyed high self-esteem, achievement and motivation and used their celebrity status in the company to cover up their deeds so that nobody could point a blaming figure on them. Perhaps if employees and other stakeholders would be trained about fraud the perpetuators would be reluctant in committing such dishonest activities. Personal integrity Personal integrity refers to the code of behaviour that guides an individual in making decisions that are sound and being able to know what is rightor wrong in a particular situation. According to the WorldCom case scandal, it is evident that Bernie Ebbers and Scott Sullivan compromised their personal integrity to engage in the fraudulent activities, being motivated by their individual greed. They did not have personal code of ethics and behaviour that would morally guide their actions. Consequently, they indulged into the dishonest activities to achieve individual benefits at the expense of the company and its stakeholders. Moral authority and ethics on the part of the two top management officials would enable them to understand that it is abuse of corporate ethics to engage in fraud, and they would have taken the necessary action to avoid the messed that would result from such dishonesty. Most importantly, principles founded on integrity and ethical behaviour would go a long way in enhancing responsibility, accountability and transparency. It would greatly win the support of other employees and the relative stakeholders in making sound decisions that are based on a consultative process. Action 1 False accounting occurs when a firm misrepresents or misstated to foster to make look as if it is financially performing well than it is actually doing (Delaney, 1992). It results when an employee or a top manager interferes with financial statements individually or under influence or pressure from top officials so that they do not show the true value of the company. The pressures that may result to false accounting include cover up of theft, to inflate the company’s share price, to attract customers due to the inflated performance, to hide losses and achieve performance related bonuses by the top management. This is done by altering the financial records to falsify them motivated to achieve any of these objectives. It has been pointed out that with regard to the WorldCom scandal, two employees of the telecom firm, Dan Renfroe and Angela Walter made journal entries totalling to $150 million and $ 771 million respectively, which did have material support to explain the recorded transactions. This was usual at WorldCom because of the corporate culture that had been developed in the company by its top management and copied by the subsequent employees. This was however an improper accounting practice since it violated the generally accepted accounting principles (GAAP) that guide the entry of transactions and calls for provision of detailed information to describe and support those transactions so that they can be authenticated and have their enforceability verified. This is attributed from the fact that a detailed support evidenced by the necessary documents is fundamental to prove the viability of a journal entry as it explains the purpose or reason as to why such an entry was created, according to the accounting principles. It is basically and extremely important to provide such report as it guides auditors and other stakeholders of the firm to assess, understand and acknowledge the completeness and appropriateness of the journal entry. Thus the management of company would be able to get professional advice and insights that would help them a lot in making sound financial decisions.Journal entries that have no supportive details are just mere writings that have no financial authentication and have no sufficient justification to be treated as financial transactions, and are consequently considered fraudulent. According to the Generally Accepted Accounting Principles (GAAP), false accounting resulting from fraud constitutes omissions or misstatements or failure to disclose crucial supportive information or documents for financial statements, which is meant to deceive the users about the information contained in the financial statements causing such information not to conform to stipulations of the GAAP (Delaney, 1992). Following the pressure of public pressure to manage WorldCom’s line costs which constituted a large portion the total costs of the company, Ebbers and Scott were worried by the worsening performance of the company and started searching for ways to reduce the line costs which were a major determinant of the large telecom company. They consequently instructed the General Accountant to reduce the line costs by $150 million, which was effected by the subordinate Dan Renfroe. Theyassumed that this would make the company look well performing so that they could attract more customers and retain the current ones by increasing their confidence on the company, as well as to enable the management to earn bigger bonus base on the seemingly high performance. Angela Walter, a manager in the accounting department, was under the instructions of Troy Normand, who was a director in General Accounting, to record an entry reducing the line costs to the tune of $771million. Assets were in return increased as follows: Other Long Term Assets were increased by $629 million and Construction in Progress was increased by $142 million. However, not any detailed support information was provided to support these journal entries, and hence the GAAP were violated since such information ought to have been provided. Fraudulent omission consequently resulted to false accounting and misrepresentation of the company’s actual performance. References Brody, K. and Dunstan, S. (2003). The great telecoms swindle. Oxford: Capstone. Babbitz, R., Ulfelder, J. and Harper, S. (2000). Inside WorldCom. Washington, D.C. (2115 Ward Court, N.W., Washington 20037): Warren Communications News. Valentin Dijksman, L. and Chiche, F. (2000). Worldcom. Paris: Eurostaf. Pavlo, W. and Weinberg, N. (2007). Stolen without a gun. Tampa, Fla.: Etika Books. Delaney, P. (1992). GAAP. New York [etc.]: J. Wiley. Appendix: Opportunity Figure 1: fraud triangle Fraud Triangle Pressure Rationalization Read More