WorldCom Accounting Scandal: A Corporate Downfall Analysis

Introduction
WorldCom was America's second largest telecom company in 2000 (The WorldCom Accounting Scandal, 2002).

Get quality help now

Sweet V

Verified writer

Proficient in: Business

4.9 (984)

“ Ok, let me say I’m extremely satisfy with the result while it was a last minute thing. I really enjoy the effort put in. ”

+84 relevant experts are online

Hire writer

Making a modest beginning in the hinterland of Mississippi in 1983 with a meager capital of less than 100,000 USD it reached the pinnacle of corporate success reporting more than USD 39 billion in revenue and USD 150 million in MCAP (The WorldCom Accounting Scandal, 2002). In the process it became 42nd in the Fortune 500 list.

Under the leadership of CEO Bernie Ebbers it grew rapidly by means of acquisitions and increased demand for telecom services farther fuelled the growth of WorldCom during the whole of 90s.

However on June 25, 2002, WorldCom announced that it had overstated earnings in 2001 and the first quarter of 2002 by more than $3.8 billion (The WorldCom Accounting Scandal, 2002). The Scandal

WorldCom scandal was one of the biggest accounting scandals of American corporate history. WorldCom was a U.S based telecommunication company. The WorldCom accounting scandal was disclosed in 2002. The Company had resorted to fraudulent accounting practices for five quarters (four quarters of 2001 and the first quarter of 2002) (The WorldCom Accounting Scandal, 2002). The well-known telecommunication company WorldCom and the accounting, auditing and consultancy enterprise were involved in this big accounting fraud. The corporate scandal of WorldCom ultimately headed the company towards the disgrace that ensued in the biggest bankruptcy in American history.

After this act the company terminated the service of the top executive including Scott Sullivan, the Chief Financial Officer and David Myers, the Senior Vice President and Controller. Myers knew that the accounting entries were made without supporting documentation, were not in conformity with GAAP, were not disclosed to the investing public, and were designed to allow WorldCom to appear to meet Wall Street analysts' quarterly earnings estimates.

In addition, during the same period Myers and others, including members of senior management, made materially false or misleading statements or omissions to WorldCom's independent auditors in connection with audits and the preparation of filings with the Commission. Myers violated the anti-fraud, books and records, and internal control provisions of the federal securities laws, and aided and abetted WorldCom's violations of the reporting, books and records, and internal control provisions of the federal securities laws. Using this illegal accounting practice WorldCom intended to defer and spread the expenditure for the next 5-10 years. Significance of Organizational Behavior Theories

Organizational theories help to the company for surviving in the global environment. The WorldCom Company CFO and Director may not have followed good organizational behavior theories. Had they followed good organizational behavior theories, they would save the organization from the failure. Ethical Decision Making

Ethical decision making represents the decision that is based on the ethics. The ethical decision making involves making those decisions that are in the favor of all related persons of company such as board of directors, shareholders and stakeholders. The ethical decision making helps the company for making the goodwill and the long term survival in the global market.

The WorldCom Company did not adopt the ethical decision making theory as if they did there would have been false numbers reported. The company was continuously doing misrepresentation of the accounts and the company became the bankrupt. If the company CFO and executive would adopt the ethical decision making theory, they would have resolved the bankruptcy due misappropriation of balance sheet of the company (McKenna, 2000). Goal Setting

Goal setting theory is very useful methods to motivate the employee to enhance their capacity for attain the organizational goal. Goal setting theory directly affects the performance of the organization. This theory helps the employee and the concern people of the company to set the appropriate objective for the organization. If the WorldCom would have adopted the goal setting theory in their organization, its executive and auditor would have not gone for the unethical accounting practices for the business (Griffin & Moorhead, 2009). Corporate Governance

Corporate governance is the set of processes, customs, policies, laws and institutions, which directed, administered and controlled over the corporation (Monks & Minow, 2008). Corporate governance is a way by which a company governs itself for providing the values to their stake holders. The WorldCom did not follow the corporate governance policy. If the WorldCom would have followed the corporate governance it would have not led towards this business failure and company would have not gone for the unethical practices conduct in the organization. Corporate governance would have increased the faith of stakeholders towards the company and company would have survived for long time (Monks & Minow, 2008). Adoption of Ethical Behavior

The Ethical Behavior would enhance the performance of the company, because the ethical behavior would creates the good image of the company among the stakeholders. If The WorldCom would have adopted the ethical behavior in the organization it would not have attained bankruptcy in the market. The company acted in unethically to misrepresent the accounts of the company (Salter, 2008). Contribution of Leadership, Management and Organizational Structures Every organization is directed with a particular leadership, management and organizational structure.

The WorldCom Company is directed by their directors, CFO and the auditors. If a leader is indulged in ethical practice its follower also follows that kind of management and leadership qualities. The WorldCom auditor was indulged in the misrepresentation of the accounts of the company and due to his this kind of conduct his followers also got indulged in wrong act. How it could have been avoided?

We conclude that the debacle in WorldCom could have been avoided by a more independent and watchful board of directors, which should have sent a signal to the company management that somebody, is watching them closely and they better mend their ways and means. The concept of board of directors is age old and when it functions properly it is effective.

In this case the independent directors failed in their responsibilities. In almost all corporate fraud it has been seen that the board has been ineffective over a long period of time and aggressive managers use this opportunity to take the rein completely in their own hand. We also conclude that Arther Anderson miserably failed in its duty as external auditor. We hold a puppet board and a malleable auditor as responsible in allowing Ebbers and his associates to perpetrate the accounting fraud. Both the board of directors and external auditors has roles in averting operational risk and they have failed in their responsibilities (McShane, Glinow, & Sharma, 2006). The Sarbanes-Oxley Act

Due to organization such as WorldCom Congress rushed to pass the complicated Sarbanes-Oxley Act. CEOs and CFOs of public companies are required to personally certify the accuracy of various financial reports, with significant criminal penalties for false certifications (up to 10 years in prison for “knowing” violations; up to 20 years if “willful”) (WorldCom scandal, nod.). While the penalties sound significant, the government’s difficulty in enforcing this provision will likely come in proving that a corporate officer’s inaccurate certification was done at least “knowingly,” as opposed to negligently or even recklessly. However, in short this law made many disclosures and certifications on the part of the firm mandatory. It also made the commitment of the external auditor binding.

This is significant in view of the fact that when WorldCom fraud came to light, Arthur Anderson simply issued a statement saying the last two year’s accounting statement are no longer reliable without owning much responsibility. What is noteworthy is the fact that US authority introduced the risk management step in the form of Sarbanes Oxley legislation, making the BOD, the company management and the external auditor responsible and bound by law. In addition, if a public company makes a required accounting restatement due to misconduct, that company’s CEO and CFO can be forced to forfeit any bonuses or profits gained from selling company stock for a one-year period.

But the lack of definitions for the terms required and misconduct, other potential loopholes, and the SEC’s power to grant exemptions could combine to dilute the strength of this provision. The new law makes it somewhat easier for the government to prohibit officers and directors who have committed securities law violations from ever again serving in those positions. However, that potential sanction was at least theoretically available even before passage of Sarbanes-Oxley. Conclusion

A leader is a person that directs a company and its management and if he adopts wrong practices to achieve personal goals, the management may get distract and go in the unethical direction. Management of WorldCom was not evaluating the efforts of its executives, CFO and auditors that is a conduct as every business demands continuous evaluation. Another major contributing factor in the direction of company's failure was its organization structure that was not managed and apportioned appropriately by its top management.

The organization structure of the World Com was also not appropriate. In WorldCom, there was the lack span of control, means the audit department was not report to the company's upper level management and not provides the right information about the accounts status of the company (Mcshane, Von Glinow & Sharma, 2006).

There was also lack of transparency in the organization. That means in the organization two different levels of management did not know about the wrongdoings which they were doing in the organization and there was not flow of information with each other. In any business, the organizational behavior of the company starts from top management. If the top management has high moral, ethical and leadership traits and standards, then so will the employees. The leaders of WorldCom, in this case did not and it not only affected the company but other telecommunications equipment manufacturers, and other employees. Top management must set the standards and keep them. Changing basic accounting procedures and the lack of ethical standards with top management contributed to the fall of WorldCom. References

Griffin.R.W & Moorhead.G. (2009). Organizational Behavior: Managing People and Organizations (9th ed.). Cengage Learning.
McKenna, E. F. (2000). Business Psychology and Organizational Behavior: A Student's Handbook (3rd Ed.). Psychology Press.
McShane.S.L, Von Glinow.M.A. & Sharma.R.R. (2006). Organizational Behavior (3rd ed.). Tata McGraw-Hill Publishing Company Limited.
Monks.R.G & Minow.N. (2008). Corporate governance (4th ed.). John Wiley and Sons. Salter, M.S. (2008). Innovation Corrupted: The Origins and Legacy of Enron's Collapse. Harvard University Press.
The WorldCom Accounting Scandal, (2002). Retrieved September 7, 2013. From http://www.icmrindia.org/casestudies/catalogue/Finance/The%20WorldCom%20Ac counting%20Scandal.htm
WorldCom scandal: Lessons for corporate America, (n.d.). Retrieved September 5, 2013. From WSJ.com: http://online.wsj.com
WorldCom Scandal. (n.d.). Retrieved September 6, 2013. From http://voices.yahoo.com