WORLDCOM
Presented by:
Eric Barr
Stephanie Jenkins
Robert Provost
Adam Wear
WorldCom
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What are the facts?
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Ebbers (CEO) had used his company stock as
collateral for both professional and personal loans
Ebbers and Sullivan (CFO/CPA) “frequently made
the decision to grant excessive compensation”
Line Costs were capitalized as “Prepaid Capacity”
A long time ensued before Cynthia Cooper came
forward with the inaccurate accounting practice
What are the Ethical Issues?
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Was capitalizing line costs ethical?
Was going along with the capitalization ethical?
Was using company stock as collateral for
loans ethical?
Was having a no-question culture ethical?
Should Andersen have questioned treatment of
capitalization more?
Alternatives
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Ebbers could have changed his business
strategy
Sullivan could have refused to go along with
accounting practices
External Auditors could have questioned more
Internal employees could have come forward
Internal Audit could have had stronger presence
Stakeholders
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Employees (Including Upper Management)
External Auditors
Shareholders of Stock
Competitors
Lenders
Customers
Practical Constraints
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Ebbers would have gone bankrupt
Company would suffer large losses
Employees could lose job
External Audit Firm could lose client
Internal Audit kept busy away from auditing
Did the Top Executives Act
Ethically?
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Bernard Ebbers, CEO
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Participated in improper lowering of expenses and inflating
revenues.
Had continued to acquire companies and put WorldCom into
debt and had used WorldCom stock as collateral for his own
investments
Scott Sullivan, CFO
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Also participated with Ebbers in improper accounting
Made sure the internal auditors time was spent on operational
audits almost exclusively
Pushed employees to make entries with no evidence and meet
numbers no matter what
Did the Top Executives Act
Ethically?
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David Meyers, Controller
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Pressured along with Sullivan for reduced line costs in
whatever way possible
Made entries to falsify financial reports with no documentation
or justification
Ronald Lomenzo, Sr. VP Financial Operations
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Prepared MonRev and Corporate Unallocated Schedule
reports
Booked entries on the schedule and restricted distribution
Did the Top Executives Act
Ethically?
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Buford Yates, Director General Accounting
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Cynthia Cooper, VP Internal Audit
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Participated in and encouraged the improper accounting even
though he saw no justification for it
Uncovered the accounting fraud and blew the whistle
Steven Brabbs, Europe & Asia Executive
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Questioned unjustified entries to top exectutives and Arthur
Anderson
Refused to make the entry, but eventually did record it through
a management company adjustment
Did the Top Executives Act
Ethically?
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Delores DiCicco, VP Wireless Finance
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Refused make an entry with no support despite heavy
pressure
Troy Normand & Betty Vinson
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Felt uneasy about some of the entries but did nothing to stop
them
Normand says he was scared of losing his job and putting his
family in financial jeopardy
Why Record False Entries?
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Bonuses/Perks dealt with bottom line
performance
Mandated to make false entries by upper
management
Assumed it was correct, no support asked for
Fear for Job
Raise Company Stock Price
What would you have done?
What are the facts?
Steven Brabbs
Troy Normand
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Vice President of International
Controls in London
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Director of Legal Entity
Accounting
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One of first to notice accounting
irregularities
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Warehoused balance sheet
accruals
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Notified Senior executives at
WorldCom
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Notified Arthur Andersen auditors
No documentary support for any
of the entries posted to these
general accounts
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Refused to make the entry on the
international companies books
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Initially questioned the entries
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Later thought about resigning
What are the Ethical Issues?
Steven Brabbs
Troy Normand
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Should he make the entry
without backup?
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Are the accruals
appropriate?
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Does the entry fairly
represent company
events?
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Should he have taken a
stronger stance?
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Who should he inform
about the issue?
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Who should he inform
about the issue?
What are the Alternatives?
Steven Brabbs
Troy Normand
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Follow corporate orders and
make the entry
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Follow corporate orders and
make the entry
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Make the entry on separate
books
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Make the entry on separate
books
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Refuse the entry
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Refuse the entry
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Report the incident
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Report the incident
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Resign
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Resign
Who are the Primary Stakeholders?
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WorldCom Employees
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Family Members
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Stockholders
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Creditors
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Arthur Andersen Auditors
What are the Practical Constraints?
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Disobeying could prevent future promotions
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Difficult to identify when your boss is wrong
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Need to support a family
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Difficult to blow the whistle on something that
you are involved in
Who Was More Ethical?
Steven Brabbs
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Notified Arthur Andersen
on at least two occasions
Refused to make entries
to international books
Set up a non-legal entity
to make the entry
Troy Normand
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Never contacted auditors
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Made non-GAAP entries
to his account
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Ignored initial
reservations
Internal Auditing
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Portray the firm’s financial situation as accurately and truthfully as
possible.
Maintain the highest standards of ethical conduct.
Disclose fully all relevant information that could reasonably be
expected to influence an intended user’s understanding of the
records, comments, and recommendations presented.
Maintain an appropriate level of knowledge and skill
(competency).
Refrain from disclosing confidential information except when
authorized or required by law (confidentiality).
Avoid conflicts of interest (integrity).
Communicate information fairly and objectively (objectivity).
Independent Auditing
Must Follow GAAS which includes both field work
and reporting standards.
Cohen Commission:
 Primary Role: Serve as intermediate between the
financial statement and the users of those statements.
 Determine whether the judgments of managers in the
selection and application of accounting principles were
appropriate or inappropriate for use in the matter at
hand.
 Express an opinion on internal accounting control.
 Detect and report errors, irregularities, and/or fraud.
Independent Auditing
Judge Burger: (Arthur Young Case, 1984)
 Examine the corporation’s books and records.
 Determine whether the financial reports of the
corporation have been prepared in accordance wither
generally accepted accounting principles
 Issue an opinion as to whether the financial
statements, taken as a whole, fairly present the
financial position and operations of the corporation for
the relevant period.
 Maintain total independence from the client at all times.
 Maintain complete fidelity to the public trust.
Operating Audit vs. Financial Audit
1.
Purpose of Audit
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2.
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Emphasizes whether historical
information was correctly
reported; oriented to the past;
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Report typically goes to many
users of financial statements.
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Limited to matters that directly
affect the fairness of financial
statement presentations.
Distribution of Reports
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3.
Emphasizes effectiveness and
efficiency; concerns operating
performance for the future;
Reports are intended primarily
for management.
Inclusion of nonfinancial areas
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Cover any aspect of efficiency
and effectiveness in an
organization and involve a wide
variety of activities.
WorldCom’s Internal Auditors and
Audit Committee
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Internal auditors performed mainly operational audits.
Avoided financial audits that might overlap with the work of
external auditors on the grounds of cost savings.
Internal Auditors only reported to audit committee at year-end.
Reported to Scott Sullivan the rest of the year, who controlled their
promotions, salary increases, bonuses, stock options, and more.
Assignment of “special projects” with no audit purpose, which
consumed most of the time of the Internal Audit’s staff.
Audit committee accepted proposed Internal Audit Plan that
focused on operational effectiveness and efficiency, systems, and
internal controls.
What are the Facts?
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Salomon Smith Barney offered 1 million shares
of IPOs to WorldCom CEO
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Salomon Smith Barney gave WorldCom
positive reports despite suspect financials
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WorldCom CEO eventually made more than
$11 million from trading
What are the Ethical Issues?
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Bankers were selectively doling out IPO shares
to individual executives instead of the public
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Financial reviews were being completed by the
same company that depended lucrative banking
business from the client
What are the Alternatives?
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Require that clients purchase their stock
shares through public forum
Set guidelines for selling IPO shares to clients
Disclose financial relationships of clients during
reviews
Require holding period for IPO purchases for
clients
Who are the Primary Stakeholders?
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Salomon Smith Barney
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WorldCom CEO and IPO holder
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The general public
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The company offering the IPO
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Analysts in charge of reviewing WorldCom
What are the Practical Constraints?
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Trying to maintain practical professional
relationships
Competitive environment pressures institutions
to provide incentives
What Actions should be Taken?
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IPOs should not be given out selectively by the
bank to clients
Analyst reviews of clients should declare that
relationship
WorldCom
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2002 saw an unprecedented number of corporate
scandals: Enron, Tyco, Global Crossing.
WorldCom went from being the nation’s second largest
long distance carrier to the brink of bankruptcy as a
result of massive fraudulent accounting practices.
WorldCom is another case of failed corporate
governance, accounting abuses, and outright greed.