The purpose of this paper is to discuss the aspects of the WorldCom accounting scandal and the effects that this scandal had on the accounting world as we know it. We will discuss the corporate culture at WorldCom and how it contributed to the accounting fraud, how the CEO’s desire to be the #1 stock on Wall Street contributed to the fraud, pressures on accountants to book and release accruals to meet expectations, pros and cons of whistleblowing, and the creditability of the accounting profession when corporate fraud is revealed. First, we must look at WorldCom as a business standpoint.
The driving factor behind this fraud was the business strategy of WorldCom’s CEO, Bernie Ebbers. In the 1990s, Ebbers was clearly focused on achieving impressive growth through acquisitions. How was he going to pay for this acquisition binge? He paid for the acquisitions by using the stock of WorldCom. To accomplish this buying spree, the stock had to continually increase in value.
“… WorldCom pursued scores of increasingly large acquisitions.
The strategy reached its apex with WorldCom’s acquisition in 1998 of MCI Communications, a company with more than two-and-a-half times the revenue of WorldCom.Ebbers’ acquisition strategy largely came to an end by early 2000 when WorldCom was forced to abandon a proposed merger with Sprint (NYSE: S) because of antitrust objections …
” (Federal Bankruptcy Report, 2002) The fraud was accomplished in two main ways. First, WorldCom’s accounting department underreported ‘line costs’ (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them. Second, the company inflated evenues with bogus accounting entries from ‘corporate unallocated revenue accounts. At the end of it all was financial gimmickry.
The problem is that the more one resorts to this sort of deception, the more complicated it becomes to continue it. Deception is just not sustainable in the long run. Complicating Ebbers’ situation was an industry-wide downturn in telecommunications. During this time, Wall Street had continuing expectations of double-digit growth for WorldCom.
After all, they had achieved so much in such a relatively short period of time.However, WorldCom needed time for its management to catch up to its newly acquired companies and learn how to run and manage them. Unfortunately, Ebbers did not have the courage to tell Wall Street that WorldCom needed time for the consolidation and digestion of its acquisitions. In order to satisfy Wall Street’s expectations, Ebbers had to doctor his company’s books.
If he had had the courage to tell them what was really needed, WorldCom would be alive today and Ebbers wouldn’t be facing the prospect of spending the rest of his life in prison.Another major factor driving this fraud was Ebbers’ very apparent desire to build and protect his personal financial condition. For this reason, he had to show continually growing net worth in order to avoid margin calls on his own WorldCom stock that he had pledged to secure loans. Ebbers was an egotistical individual.
He had a desire to be number 1 in everything that he did whether in the business world or individually. His ability to deceive other led to the debacle of the WorldCom accounting scandal.The accountant will sometimes be asked or even will take it upon himself to book and release accruals to meet expected goals of the company. It would be easy to accomplish this using the accrual method of accounting.
In accrual accounting, “by their very nature require a certain amount of estimating, judgment and discretion. ” (Accounting Capstone, 432) Therefore, earnings manipulation that operates within the accrual accounting and GAAP has no effect on total income over the life of the company but merely moves from one period to the next. The main point in regard to accounting discretion is that its application potentially involves a gray area that lies between legitimate discretion and the fraudulent abuse of discretion. In practice, it is not always easy to determine at what point legitimate discretion becomes aggressive discretion, or at what point aggressive discretion becomes abusive and fraudulent”.
(Accounting Capstone, 433) As one can see it is totally dependent upon the integrity of the accountant as to whether the accrual accounting is above board or not.Whistleblowing can be defined as the disclosure by a person, in a government agency or private enterprise, to the public or to those in authority, of mismanagement, corruption, illegality, or some other wrongdoing. Since the 1960s, the public value of whistle-blowing has been increasingly recognized. For example, federal and state statutes and regulations have been enacted to protect whistleblowers from various forms of retaliation.
Even without a statute, numerous decisions encourage and protect whistleblowing on grounds of public policy.In addition, the federal False Claims Act (31 U. S. C.
A. § 3729) will reward a whistleblower who brings a lawsuit against a company that makes a false claim or commits Fraud against the government. (Free dictionary) Persons who act as whistleblowers are often the subject of retaliation by their employers. Typically the employer will discharge the whistleblower, who is often an at-will employee.
An at-will employee is a person without a specific term of employment. The employee may quit at any time and the employer has the right to fire the employee without having to cite a reason.However, courts and legislatures have created exceptions for whistleblowers who are at-will employee. Cynthia Cooper, whistle blower at WorldCom, tried many times to get the board of directors at WorldCom to look at the financing ways of the company.
When she went to the board, she was basically laughed at and the CFO Scott Sullivan was given a week to put together a white paper to give credence to the position that he was taking. She and her auditing team had to work at night to keep from being detected by the “top brass” at WorldCom.As one can see, the job of whistleblower is neither an easy one nor a desirable one. Most are laughed at called crazy and people actually think that they may have mental problems.
Therefore, many people look the other way when it comes to turning in the company for fear of losing their job and being black-balled in the corporate world. In a quote from Cynthia Cooper in CFO magazine “I encourage people not to give in to the thinking that fraud won’t happen in their companies. History has a way of repeating itself, and based on human nature there will always be fraud.When there’s increased pressure due to another boom-and-bust in the market, there may well be another rash of frauds.
I think we have to do our best not to forget what we’ve been through and hold tight to the positive changes in corporate governance that so many people have worked to achieve”. (CFO magazine February, 2008) When a corporate accounting scandal of fraud is discovered, it is usually the accountant that will take the blame for the fraud. With the scandals at Enron, WorldCom, Nortel, and Sunbeam Corporation, the accountant took a beating in the corporate world.It, at one point, was thought to be the lowest occupation that someone could have.
Actually it is usually just one or two in the corporation that has perpetrated the fraud but the whole accounting field takes the blame. There are many more ethical accountants than there are unethical ones. Every class that the author of this paper has taken in college accounting has at least one chapter on ethics. With the Sarbanes-Oxley act (SOX), the profession is making a comeback in the corporate world.
Under SOX the prevention of financial statements fraud discussed.Compliance with this act is mandatory for publicly traded companies. “The general philosophy behind SOX is to minimize fraud by promoting strong corporate governance and organizational oversight through the oversight of the following groups: Board of directors, audit committee, management, internal auditor, external auditor, and public oversight bodies. ” (Accounting Capstone, 428) As one can see with SOX, it would be virtually impossible to commit fraud in the corporate setting if all six committees are doing their job.
SOX has helped the credibility of the accountant in this manner. It is actually one of the more prestigious professions in the corporate world today. The author has attempted to discuss the following questions in this paper: corporate culture at WorldCom, CEO’s desire to be number one on wall street and the ramifications of such acts, pressure on accountants to “cook the books” to make the company look better, whistleblowing pros and cons, and the creditability of the accounting profession in wake of accounting schemes.