What began as a routine internal audit, transformed into the largest accounting manipulation of all time. Worldcom, a leading telecommunications company built from over 70 acquisitions, found itself ranked at the top of its class for illegal and creative accounting practices. Worldcom leaders successfully managed to erode the company market value from $180 billion in 1999 to approximately $350 million today. In June of 2002, Cynthia Cooper, Vice President of internal audit, uncovered suspicious capitalizing of line costs that had been treated as expenses in prior years. Cooper brought the “accounting discrepancy” to the attention of Scott Sullivan, Chief Financial Officer at the time. Sullivan dismissed Cooper’s concerns and attempted to convince her to postpone the audit.
Unfortunately for Sullivan and Ebbers, Cooper continued her investigation and presented her findings to Max Bobbitt, Head of Worldcom’s Audit Committee, who then informed the rest of the committee and KPMG. The Worldcom empire began to shake. At first, the issue in question was approximately $4 billion of misallocated line costs in the financial statements beginning in 2001 to the first quarter of 2002. By capitalizing these expenses, Worldcom managed to “produce” profits for five quarters that would have otherwise shown loses.
As if that were not bad enough, other fraudulent accounting practices were unveiled going back to 1999. An additional $2 billion reserved for bad debts was improperly used to boost operating income. Other accounting manipulations included inflating profit-margin figures by arbitrarily reducing line costs and maintaining fake accounts on the accounts receivables books. In total, Worldcom almost successfully misrepresented profits by approximately $7 billion with an additional $2 billion in question.
The Worldcom failure was a shock to many, but reality is, there were many “warning signs” that indicated trouble as early as 1999. Critically analyzing and leveraging these signs may have helped investors, board members, and executives prevent the fall of this major telecommunications company. Worldcom leaders bred a culture of cutting corners to meet business needs. Customers, employees, and shareholders were all pawns in the game of making money. Worldcom was an “ethically challenged company.” A mentality of cashing in and a Machiavellian approach to meeting numbers permeated Worldcom from executive management to customer service representatives. So, how can you spot the next Worldcom? Look below for major clues. Management promoted a culture fixated on “the numbers”
During analyst meetings, Ebbers would only discuss the share price. He had been known to show a graph of an increasing share price of WorldCom and ask: “Any questions?” Going back as far as two years ago, employees were told to capitalize obvious expenses in order to meet aggressive targets. For example, one employee was told to capitalize plane tickets when visiting company sites. In March 2001, revenue numbers weren’t at a satisfactory level, therefore Sullivan, in hopes to improve current profit margins, provided David Myers, Worldcom Controller, with “alternative financial numbers along with an implicit command to substitute them for the company’s actual financial data.”
12 Worldcom allocated significantly higher reserves for bad debt that would ultimately be used to boost operating income to meet income targets for that period.13 Since revenues were booked when the bill was issued as opposed to when the payment was received, Worldcom habitually overcharged and added undesired services to meet numbers. In total, billing errors had the potential of adding a significant amount to Worldcom’s bottom line. For example, at one point, Infolink “owed” Worldcom $300,000 in billing errors.
Corporate culture that was fixated on the “numbers,” corporate greed, and high debt.
1. What does worldcom’s experience teach us about corporate wrongdoing? Ans: This experience teachs us about the corporate wrongdoing by which you can gain a big name in the market. But Ethics tell’s us that we should be fair to our work and should have the courage to stop these wrongdoings for the betterment and improvement for the people who are associated with the corporate sector.
2. What does cynthia cooper’s teach us about the courage? Ans: Every one has the ability to differentiate between god/bad and right/wrong. So the step to come forward and speak the truth in front of the whole world is courage, and cooper’s example teaches us that no matter what the circumstances are u should always speak the truth.
Not only did Worldcom create one of the largest telecommunications company, it also created a spectacular culture of cutting corners. Corrupt business practices took hold, driving leaders to make irrational business decisions and alienating customers and employees. WorldCom’s management style and mentality, corporate strategy, and customer/employee relations all provided clues to the downfall. In the end, this was a story of corporate character, and what happens when it goes very wrong.