Worldcom

CASE 3 : Accounting Fraud at WolrdCom

Table of Contents Introduction....................................................................................................................... 1 Question 1 .......................................................................................................................... 2 Question 2 .......................................................................................................................... 4 Question 3 .......................................................................................................................... 6 Question 4 ........................................................................................................................ 10 Question 5 ........................................................................................................................ 16 References........................................................................................................................ 24

BKAL 3063 Integrated Case Study

0

CASE 3 : Accounting Fraud at WolrdCom Introduction WorldCom, US second largest telecommunication company shocked the world by filing bankruptcy at 21 July 2002. The WorldCom filing surpassed Enron and became the largest bankruptcy filing in United States history. Due to its rapid growth, WorldCom is also heavily in debt as they finance the company growth with debt. The collapse of WorldCom did not just affect their employees, retailers, the government but also bankers. WorldCom was a multi-billion dollar telecommunications company that was founded in 1983. The company starts their business under the name 'Long Distance Discount Services' (LDDS), providing long distance telecommunication services. The venture was profitable right from the start. In 1985, Bernie Ebbers became the company's CEO. The company changes its name to WorldCom in 1995. During the 1990’s, the company starts to grow through series of successful acquisition and merger. However, during the late 1999, the company’s performance begins to slip due to heightened competition, overcapacity and reduced demand for telecommunication services at the onset of the economic recession and the aftermath of the dot-com bubble collapse. Other than that, falling telecommunications companies and new entrants were drastically reducing their prices leads WorldCom. All these pressures caused WorldCom to involve in accounting fraud. Scott Sullivan, WorldCom's CFO, begins the process of misallocating as capital expenditure what should have been normal expenses, thus turning losses into profit, creating a smokescreen that the company is performing well. Things start to come under light at June 2002 and the company’s stock price plunged. Investigations were carried out. On June 25, WorldCom admits that it had inflated its earnings by $3.8 billion -- the largest accounting fraud in history. After series of investigation, the total amount discovered from improper accounting procedures raised to $9 billion causing WorldCom to file bankruptcy in July. Several top management personnel were held responsibilities for the fraud.


1

CASE 3 : Accounting Fraud at WolrdCom Question 1 What are the pressures that lead executives and managers to “cook the books”?

Issue When 1990, revenue growth slowed and the stock price began falling. WorldCom's expenses as a percentage of its total revenue increased because the growth rate of its earnings dropped. This also meant WorldCom's earnings cant Wall Street analysts' expectations. These situation pressures WorldCom to cook the books.

Analysis of Issue In an effort to increase revenue, Ebbers put pressure his employees that he wanted by the number one stock in Wall Street. He demanded his employees to increase the revenues that focused on building revenues and acquiring capacity sufficient to handle expected growth even if the long-term cost exceeds the short-term profit. Revenue growth was a key to increasing the company's market value. As a result of this demand by Ebbers, executives and managers needed to show increasing in the revenues that they started cooking the books. WorldCom entered into long-term fixed rate leases for network capacity in order to meet the anticipated increase in customer demand. WorldCom could avoid lease payments only by paying hefty termination fees. If customer failed to meet expectations, WorldCom would pay for line capacity that it was not using. The telecommunication industry began to fall apart as a result of the high competition along with the low demand at the onset of the economic recession and the aftermath of the dot-com bubble collapse. As new entrants began to enter the market, this led the prices to decrease further and WorldCom forced to match. Due to this, WorldCom faced a higher pressure to increase its revenues Also, WorldCom struggled to maintain the same level of E/R ratio, closely monitored by analysts and industry observers. They also are facing pricing pressures and its high committed line costs. Moreover, WorldCom was faced by that the company may not be attractive to investors anymore. Ebbers, the CEO, BKAL 3063 Integrated Case Study

2

CASE 3 : Accounting Fraud at WolrdCom treated the senior managers by saying that they will lose everything. He made emotional speech to senior managers about how he and other directors would lose everything if the company did not improve its performance. This has actually encouraged the managers to do whatever it takes in order to n boost the revenues and remain in their jobs. Consequently, Sullivan decided to entries to achieve targeted performance. Sullian fined that the only way, which he and his two staff used main accounting tactics that accrual releases and capitalization of line costs to manipulating with the figures in order to show that company is in a better position.

Conclusion Pressures such as meeting market expectation, economy recession and intense competition within the industry has lead executives and managers to “cook the books”.


3

CASE 3 : Accounting Fraud at WolrdCom Question 2 What is the boundary between earnings smoothing/earnings management and fraudulent reporting?

 It

Earnings Management is

a

strategy

management influence

of

or

used a

Fraudulent reporting by

company

manipulate

the to

reported

earnings by using specific accounting methods,

such

accelerating

as

expense

deferring or

or

revenue

transactions.

 Fraudulent financial reporting is an aggressive act taken by executives within a company to intentionally conceal financial information about the

 This practice is carried out for the purpose of income smoothing. Thus,

company and to deceive others about the wealth of the company.

the company will be able to make its earnings relatively stable from year to year.

 Earnings management is not an illegal act.  Earnings

 Fraudulent reporting is an illegal act.  Fraud

reporting

consists

of

usually

management manipulating or omitting

involves the artificial increase (or

important financial figures, with the

decrease) of revenues, profits, or

difference being that fraud usually has

earnings per share figures through

substantial mistakes that can drastically

aggressive accounting tactics.

change the bottom line or stock price

management

of a company.


4

CASE 3 : Accounting Fraud at WolrdCom  Occurs when managers use judgment in

financial

structuring

reporting

transactions

and to

in alter

financial reports to either mislead some

stakeholders

about

the

underlying economic performance of a company or influence contractual outcomes that depend on reported accounting numbers.

 When a company commits fraud by fraudulent reporting and is caught, the penalties are substantial.

They are

usually expected to pay enormous fines to the government and compensate their shareholders, as well as the executives potentially paying time in jail.

Conclusion In my opinion, the boundary between income smoothing and fraudulent reporting is blurred. This is because both actions will prevent investors or creditors, who usually rely on the company’s financial information in making decision, from receiving consistent and reliable results. So, implementing either earning management or fraudulent reporting would give the same misleading information regarding the company’s earnings.


5

CASE 3 : Accounting Fraud at WolrdCom Question 3 Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom?

Analysis of Issue There are quite a handful reasons that actions taken by WorldCom managers were not detected earlier. These reasons are divided into internal and external factors. Internal Factors Top management is the heart of a company. They are the one who runs the company and making the best decisions for the company. In the case of WorldCom, persons who involved in fraud were the ones from the top management such as the CEO, CFO and controller. If the top management were involved in fraud, most likely they would use their influence in the company or abusing their power in order to achieve their personal interest and cover up their tracks. Furthermore, if the top management is involved in fraud, there are limited channels for the subordinates to report about the fraud. Corporate culture of WorldCom is one of the contributing factors. The organization culture in WorldCom is flawed and induces fraud to happen. In WorldCom, its employees are prohibited to question their supervisors and require them to follow every instruction given. Other than that, the operation in every department is not uniformed. Every department has its own rules and management style. Communication is important for a company. Through communication, departments could exchange information, getting new updates and decisions can be made through the reporting. Poor and lack of communication is what that happened in WorldCom. We can see that through the relationship between the employees and their supervisor, between departments, between internal and external auditor and between boards of director.


6

CASE 3 : Accounting Fraud at WolrdCom Information was limited and being blocked causing the true picture of the company stays in the dark. Last but not least, the mindset and awareness of the employee. The mindset of employees in WorldCom is to follow their supervisor’s instruction, do not question the instruction given and mind their own business. They do not challenge their supervisor or report about anything suspicious because they are afraid if there are any inevitable consequences. Besides that, their awareness about fraud is low. The employees do not know how to handle the situations when there is fraud happening in the company and being victimized by the management. External Factors External auditor plays an important role in a company. Their job is as a watchdog and expresses their opinion of the financial report. An auditor also upholds principles such as independence, objectivity, integrity and competency and due care, confidentiality, professional behavior and technical standard. However, most the principles mentioned above weren’t seen in WorldCom’s auditor, Arthur Anderson. In the case of WorldCom, there were signs and symptoms of fraud, however, the auditors failed to detect any fraud and issued unqualified audit report for years. This shows the ignorance and incompetence of Arthur Anderson while conducting audit work.

Recommendation Processes or systems should be in place to prevent or detect quickly the types of actions that occurred in WorldCom includes enhance code of corporate governance, implement whistle blowing policy, conduct proactive auditing, enhance the communication within the organization and annually reviewing the performance auditor. The company should comply and enhance the code of corporate governance. Corporate governance is a mechanism for monitoring the actions, policies and decisions of corporations. The compliance of the code of corporate governance it would enhance


7

CASE 3 : Accounting Fraud at WolrdCom transparency and efficiency of the overall company performance. This would minimize the risk of misconduct and fraud from happening. Furthermore, the company also may implement whistle blowing policy in the company. Employees are sensitive to changes in a company and they often know more and clear about the current situation of the company. The implementation of whistle blowing policy would allow the management team to find out the flaws in the company and actions can be taken immediately. The information regarding of the whistle blower should be kept confidential and rewards can be given accordingly if the information given by whistle blower turns out to be true to encourage whistle blowing. Due to its complicated business nature, the company also may request its auditors to perform quarterly or half yearly proactive audit. It can be considered as a preventive measurement. Proactive audit are able to minimize the risk or preventing fraud from happening and detecting fraud at early stage. Other than that, the company also should enhance the communication within the company. The company may mend the bond between the audit committee, internal auditor and external auditor through communication which allows them exchange information, express their opinion and free from third party interference. Board meeting being held also should include outside directors, so that they can do their job such as question the management’s decision. The audit committee of the company also should annually review the company auditor. Review should be done based on auditor’s fundamental core competencies and performance. If the auditor is no longer fit for the position, they should terminates its service and appoint another auditor in board meeting.


8

CASE 3 : Accounting Fraud at WolrdCom Conclusion The reason is that actions taken by manager are unable to be detected earlier is because of the top management was acting in collusion with the auditor in concealing the act of fraud. The flawed company culture, the mindset and awareness of the employees and poor communication were also part of the contributing factors. Actions such as enhancing and complying corporate governance, implement and encourage whistle blowing policy, enhancing communication, annually reviewing auditor’s performance and conducting proactive audit would prevent or detect quickly the types of actions that occurred in WorldCom.


9

CASE 3 : Accounting Fraud at WolrdCom Question 4

Were the external auditors and board of directors blameworthy in this case? Why or why not?

Analysis of Issue External Auditor

According to ISA 200, it requires that an audit be designed to provide reasonable assurance of detecting both material errors and fraud in the financial statements. There are several reasons that Arthur Andersen as WorldCom’s external auditor failed carry out its duties properly to discover fraud. One of the reasons is Arthur Andersen lack of professional scepticism. Professional scepticism is an attitude that includes a questioning mind and a critical assessment of audit services. In the case, Arthur Andersen just took orderly the corporate general ledger which made by General Accounting without any questioning mind and assume that the information recorder by General Accounting was valid. This is because a flaw in Andersen’s approach that was limited its testing of account balances which relying on WorldCom’s perceived strong internal control environment. However, WorldCom’s internal control environment was inefficient which allowed Andersen to overlook serious deficiencies in the internal environment.

Besides that, there is lack of independent for Arthur Andersen. This is because they material business relationship where they treat WorldCom as a crown jewel instead of being rigorous and sceptical which will jeopardise their services by not providing objectivity view. This can be showed that the procedures for external audit did not match the risk profile that Andersen has assessed for the company which they believe that the risk that WorldCom revenue would be misstated is because of error or inaccurate records but not but deliberate misrepresentation.


10

CASE 3 : Accounting Fraud at WolrdCom In addition, WorldCom had put restriction on external auditor to access information and yet they did not report the matter to audit committee which they rate WorldCom’s compliance with requests for information as ‘fair’. All these situations had indicated that Andersen has conflict of interest where Andersen wants to have a long term relationship with WorldCom.

Therefore, the auditors must use professional scepticism as they consider how to proceed when fraud is uncovered. When investigate further, there are certain procedures that should take by auditors. The auditor should not contact the person who committed the fraud directly because this may give them a chance to cover their fraud. Hence, the auditor should obtain an understanding of the situation, talk to management at least one level above the fraudster or directly talk to audit committee if top management is the suspected perpetrator, obtain more evidence, consult with legal counsel, communicate with the audit committee, and lastly resign from the engagement depending on the extent of the fraud. The external auditor is the one that must come in with an objective, unbiased mind set and audit the company with integrity, honesty and independence. So, after some justification above, Athur Andersen is blameworthy in this case.

Board of Directors Board of directors are blameworthy in this case. The board of directors in WorldCom lack of active participation during the board meeting. This is because the outside board of directors do not meet Ebbers, Sullivan or any other WorldCom employees outside of the board meeting and the only way that outside director can communicate with the inside director or understand the company operation and culture of the company is by attending the board meeting. However, the number of board meeting held in WorldCom is quite less where just 6 times per year and the meeting just consist of a short series of short presentations from the chairman of the compensation and stock option committee general counsel who discussed legal and regulatory issue and CFO Sullivan who discussed about financial issues which just took few 30 minutes to an hour for the meeting.


11

CASE 3 : Accounting Fraud at WolrdCom Besides that, before one week of the board meeting, directors will receive a packet of information that contained regarding the issue that going to present in the meeting which there is not sufficient time for directors to identify all the information where WorldCom consider as a complex company after WorldCom done the merger and acquisition. All these factors had led them not to actively participates and hence affect them lack of awareness about the WorldCom’s matter due to directors may not able to challenge and question during the meeting since they just have little sense of the company culture, information about the company and awareness about some of the issue that brought up by senior managers.

Besides that there is no segregation duty between chairman and chief executive official (CEO). According to the case, Bert Roberts Jr. was the chairman of the board director but he does not perform the role and responsibilities as a chairman. This is because he has passed the power to the CEO, Ebbers and thus Ebbers indirectly has become as a chairman of the board members. So, this situation had led that Ebbers hold two positions simultaneously which as a CEO for WorldCom and as a chairman for the board member. CEO duality occurs when the same individual holds both the CEO and chairman of the board of directors. According to the case, it can show that CEO Ebbers presided the board meeting and determined their agendas. CEO duality might increase the risk of conflict of interest where the CEO or chairman will tend to focus on his own self-interest rather than focus on the shareholder interest. This is because Ebbers at the same time hold two position mean that there is unfettered power in his hands. As a result, this has led the board lack of awareness regarding the matter of financial fraud in WorldCom.

Compensation Committee does not play a proper role regarding to the matter of the company฀s loan to Ebbers was more than $400 million. In the case, the compensation committee agreed to provide enormous loan for Ebbers without initially informing the full of board member and does not receive any assurance or collateral from Ebbers and his business interest to secure the loan. In addition, those extraordinary loans are borrowed to Ebbers’s business activities which are not related to WorldCom where


12

CASE 3 : Accounting Fraud at WolrdCom compensation committee provide fund to Ebber to operate his personal business activities.

In addition, the Board ratified and approved the compensation committee’s action. This situation had indicate that the board and committee had make a decision which are not align with shareholder interest where the committee failed to perform appropriate due diligence which they did not questioning the purpose and oversee Ebbers’s use of the fund. As a result, this situation showed that the board member lack of competence where they did not realize the consequences that could occur to WorldCom after they approved the loan.

Active participation of board of director and involved within an organization is an important internal control for the organization. Therefore, in order to overcome the issue of board of director in the lack of participation, the board should meet regularly and run effectively when it meet where the board should held meetings at least eight times per year and two or three meetings should be held at locations which the company has the facilities other than company headquarters.

Besides that, in order to increase the participation of board members, they can meet external auditor, internal auditor and employees of WorldCom independently without participation of the CEO or any other member of management which is outside the board meeting. For example, board member can visit operating centers where they can expose to more employees and help to communicate corporate values in interaction with wider group. Thus, by having regularly met and visiting to operating centers, the board member can better understand about the company’s business and its risk. Hence, the board should have enough time to consider critical issues since they are involve in the business operation and thus they can rise question or challenge or discuss about those critical issue during meeting.

According to agency theory, the position of CEO and chairman should be separate where CEO duality is considered to impair good corporate governance. Agency theory is a BKAL 3063 Integrated Case Study

13

CASE 3 : Accounting Fraud at WolrdCom simple agency model that suggests that as a result of information asymmetries and selfinterest, principals lack reasons to trust their agents and will seek to resolve these concerns by outing in place mechanisms to align the interest of agents with principals and to reduce the scope of information asymmetries and opportunistic behavior. So, in order to align the interest of agents with principle, agency cost will arise due to the need from the principal to monitor the activities of agents. This is because principals need to find out what agent is doing which may be difficult be since they are not the person who directly involve in the company operation and may not have as much information about what is going on as the agent does. So, there is a need to implement segregation duties between chairman and CEO.

Therefore, WorldCom should appoint another person who is independent and nonexecutive director to be chairman of the board member. This is because the benefits to split both role is to reduce the unfettered power of Ebbers in WorldCom who indirectly hold chairman and CEO position which concentrate into one pair of hands and the chairman can provide a second effective viewpoint and also contributes his or her own experience on the augmenting the board. Besides that, a separation chairman can also ensure that executive management pays sufficient attention to the interest of minority shareholders and protect their interest. Breeden emphasis ‘doing the right thing’, stating that every Board whether at a national, business or university level will at some point be faced tough decisions and challenges.

Therefore, competency is the key success factor that the Board is required to take action and resolve any problems. So, in order to overcome the issue of the Board at WorldCom which lack of the competency, the Board should attend training like continual professional development where the director can extend their knowledge and skills on an on-going basis and also typically involve content on regulation and law, best practice, new development and etc. So, by attend training, it enable director to keep all those areas up to date and to ensure that they do not fall behind on key skills. As a result, by increase the competency of the board can increase the skills of director problem solving and also


14

CASE 3 : Accounting Fraud at WolrdCom improve decisions making which will bring benefit to the shareholders and also to the company.

Conclusion The auditor and the board of director are blameworthy in this case as they failed to play their role in the company. They are the ones should be responsible for the fraud happening in WorldCom.


15

CASE 3 : Accounting Fraud at WolrdCom Question 5 a) Betty Vinson: victim or villain? Should criminal fraud charges have been brought to her? b) How should employees react when ordered by their employer to do something they do not believe in or feel uncomfortable doing?

Analysis of issue (a). Generally, a victim is deemed to be an individual or group who has suffered as a consequence of someone else's actions or beliefs, or as a result of unpleasant circumstances. Meanwhile, the villain is someone who deliberately harms other people or breaks the law in order to obtain what his or her wants. As far concern, in the issue of judging whether Betty Vinson is a victim or villain in the WorldCom corporate scandal. There are two perspectives that have to be taken into consideration account such as, ethical consideration, and legal in the manner of judging whether Betty Vinson is a victim or villain and to derive a conclusion whether she should be imposed with criminal charges or otherwise. The ethical consideration perspectives. As what can be seen from the case, Betty Vinson, Director of Management Reporting at WorldCom initially been pressured by Yates, David Myers and Sullivan to aid in scrambling the financial result and to make illegal entries to bolster WorldCom’s profits only one time and assured by Sullivan that he would take full responsibility for the action and they also promised her that the manipulation of accounts would not be repeated again. Being a senior manager worked under them and believing in Sullivan’s words. Betty Vinson did as what she was told by the superior promptly and she continues to do same the same thing for a long period. Consequently, this indicates that Betty Vinson was morally responsible for fraudulent activities in WorldCom.


16

CASE 3 : Accounting Fraud at WolrdCom Moral

Definition and Case issue

responsibility elements Causality

Under causality, individual aware of the relationship of causes and effects that arises due to their personal act or helped caused the injuries, or failed to prevent it when he or she could and should have. As far concern, initially Betty Vinson refused to falsify or scrambles the accounts. But, later when she is convinced and assured by Sullivan that he would take full responsibility for the action and also promised her that the manipulation of accounts would not be repeated again. With these, she decided to do so. At the same time, she aware that is illegal offences towards the accounting standards and improper practices and such course of action could create an enormous loss and impact to the investors who aid financial in WorldCom as well as the employees, the retail customers and the public will be significantly affected. While, being the breadwinner for her family, fear of losing the job and to sustain attractive benefits, she couldn’t avoid herself from doing the fraudulent activities in WorldCom.

Knowledge

Under the knowledge element, the individual is morally responsible when their action is done with their knowing on what he or she was doing. As indeed, Betty Vinson at the very beginning itself involved in obtaining the account number of the international fixed costs in order to release $370 million accruals as required by Yates, David Myers and Sullivan and she did the wrongdoings with her knowing’s. Even, Timothy Schneberger (Director of international fixed costs) refused to make the adjustment. Betty Vinson, did all the fraudulent activities without any feeling of uncertainty that


17

CASE 3 : Accounting Fraud at WolrdCom the actions were wrong even though she herself had difficulty and personal dilemma and she knows that.

Freedom

Under the freedom element, individual must act of their own free will or locus of control and personal deliberation and is not forced by internal or external forces. Although, Betty Vinson has been persuaded by many parties in the WorldCom to conduct fraudulent activities. As fact, by being an accountant in WorldCom for a long time, Betty Vinson supposedly should know that the bolstering the WorldCom revenue without a proper compliance of standards is an illegal action but she still continued the acts at her own free will. This matter hence proved that she was morally responsible for the fraud as she did the wrong by knowing it as a sinful to her own free will even though she did not contribute to the initial cause of the fraud.

From the legal perspective, Betty Vinson was not believed to be a victim, but she was a co-conspirator and valuable witness in the WorldCom corporate scandal and she helped the authorities to resolve the scandal. As a matter of fact, Betty Vinson was convicted under two counts and pleaded guilty to criminal conspiracy and securities fraud with the consideration that the proved was beyond a reasonable doubt, criminal charges has been imposed to Betty Vinson carries a maximum sentence of 15 years in jail sentences. This is due to several factors that indicate Betty Vinson involved in the fraudulent activities:


18

CASE 3 : Accounting Fraud at WolrdCom Factors

that

indicate

higher Case issue

culpability Intention

Betty Vinson has an intention to commit fraud or to scramble the accounts in which Betty Vinson was fear of losing the job, to gain attractive benefits, and to support her family in all material aspects. Even though, the fraud was done with the persuasion of her superior but, she still has some intentions to do so owing to several reasons.

Offenders are committing fraud in a The fraudulent activities were conducted by a group

group or syndicate such as in the WorldCom Corporate scandal arises from the group of syndicate Ebbers, Sullivan, Yates, David Myers Betty Vinson, and Tony Normand,

Professional offending

The scramble of line cost account or accrual release by Betty Vinson is considered to be offences with the professional conducts such as

noncompliance

with

US

GAAP

as

stipulated. High level of profit from the offences

Even though, Betty Vinson didn’t receive any high profit from the scramble of line cost accounts or the cooking of the WorldCom books.

However,

she

does

receive

an

increment in salaries to $80,000 as previously was $50, 000 and promotion due to her cooperation to conduct fraudulent activities. Deliberate targeting of vulnerable Betty Vinson scrambles the accounts as victim

required by her superior in order to falsify bolster of the WorldCom revenue with the motive of achieving desired E/R ratio in the


19

CASE 3 : Accounting Fraud at WolrdCom manner

retaining

investors

and

other

interested parties.

In somehow rather, the severity of criminal charges of 15 years jail sentences towards Betty Vinson has been reduced and she only spent 5 months in jail and 5 months of house arrest. Moreover, Betty Vinson was released with on a bond secured by $25,000 of equity in her home as her appeal for the guilty plea in which she was unable to pay the lawsuits and the restitution. This is due to the situation, in which she was fully cooperating with authorities (SEC, legal authorities) in the prosecution and her confession of guilty smoothen the process of retrieving evidence of falsified accounts and to find other perpetrators that involved as well.

(b). On the other hand, the employees should know the steps to resolve any dilemmas that confront with the ethical values when they feel inconvenienced of doing something that ordered by their employer. Meanwhile, employees should be aware and follow up with the enforcement of rules and regulations such as whistle-blowing as it is not in the matter of ignorance. Firstly, employees should consider the future assured action in confronting with an ethical dilemma is by abiding with the code of ethics as a form of guidelines. Even, in the WorldCom case however, there were no in written policies for the management practices and rules itself yet the code of ethics. Therefore, employees in WorldCom had no formal guidance to lead them to an ethical decision in abiding or disobeying their superiors such as Sullivan, Myers and Yates. As a fact, The IFAC’s Code of Ethics (2006) is developed eventually after the WorldCom corporate scandal in order to provide clear guidelines on how a professional accountant should comply with the following principles: integrity, objectivity, professional competence and due care, confidentiality and professional behavior. In addition, employees should make an ethical decision which entails a “rightversus-wrong” decision as the one in which there are a right (ethical) choice and a wrong (unethical or illegal) choice. When a person makes a decision that’s unmistakably


20

CASE 3 : Accounting Fraud at WolrdCom unethical or illegal, then person committed an ethical lapse. For example, Betty Vinson had an ethical lapse or dilemma when she caved in to her superior’s pressure to cook the WorldCom books. Apart from that, the employees may determine themselves with the alternative actions that are available to them in that situation. After that, they should weigh up the benefits and costs of the alternatives to themselves as well as to others who might be affected by the action taken. The alternatives that produce the greatest benefits then should be chosen. Taking Betty Vinson as an example in which she should not only consider about her personal matters besides the company’s sake, but she also should consider the consequences towards the company’s shareholders and stakeholders before performing the fraud. The steps as listed below indicate how employees can avoid ethical dilemma by making a better ethical decision: 1. Is the action is illegal 2. Is it unfair to other parties 3. If I take it, what I feel about it 4. Will I be ashamed to tell my family members, co-workers 5. Will I be embarrassed with if my action is written up in the local newspaper?

Whereas, employees may use whistle-blowing as a legitimate channel to expose the misconduct, alleged dishonest or illegal activity occurring in an organization. The alleged misconduct may be assigned to various ways. For example, a violation of a law, rule, regulation and a direct threat to public interest such fraud, health and safety violation and corruption. Whistle blowers may make their allegations internally (to other people within the organization) or externally (to regulators, law enforcement agencies, to the media or to groups concerned with the issues). For example, from what we can see in the WorldCom corporate scandal, the misdeeds of Betty Vinson and her accomplices at WorldCom didn’t go undetected. They caught the eye of Cynthia Cooper, the company’s director of internal auditing who could have looked the other way, but instead she summoned up the courage to be a whistle-blower or an individual who exposes illegal or unethical behavior in an organization. The following describes the involvement of authorities to enforcements whistle-blowing in order to safeguard employee’s interest and information. BKAL 3063 Integrated Case Study

21

CASE 3 : Accounting Fraud at WolrdCom I.

The US government Some Whistle blower protection act was established.

II.

Wall Street Securities whistle-blowers are provided incentives and protection by the Dodd Frank Wall Street Reform and Consumer Protection Act (2010).The SEC Office of the Whistle-blower offers whistle-blowers significant incentives and increases protection for whistle-blowers in the SEC whistle-blower program. This legislation authorizes the SEC to reward those who provide information concerning violations of the federal securities laws at companies that are required to report to the SEC. Further, the Dodd-Frank Act strengthens the whistle-blower protection provisions of the False Claims Act, and contains one of the strongest confidentiality provisions for whistle-blowers ever enacted. For the first time, whistle-blowers will be permitted to initially report fraud anonymously by filing a claim through an attorney. Additionally, the law prohibits employers from retaliating against whistleblowers. Employers may not pull the trigger, demote, suspend, threaten, harass, or discriminate against a whistle-blower. The Dodd-Frank Act expands the reach of whistle-blower protections provided under the Sarbanes-Oxley Act of 2002 to include employees of public companies as well as employees of its private subsidiaries and affiliates. Whistle-blowers who suffer from employment retaliation may sue for reinstatement, back pay, and any other damages incurred.

III.

Securities Exchange Committee (SEC) The SEC Office of the whistle-blower was formed as part of the Dodd-Frank Act. They help handle whistle-blower tips and complaints, and provide guidance to the Enforcement Division staff. They will help the committee to determine the size of awards for each whistle-blower. Further, SEC assists


22

CASE 3 : Accounting Fraud at WolrdCom whistle-blowers by promoting the program, providing guidance and answering questions about the program

Conclusion In a nutshell, from the both perspective Betty Vinson can be considered as a villain as she morally responsible for the fraudulent activities and for the commitment of crime or fraudulent activities in WorldCom. Hence she should be charged on the criminal fraud charges as well as by considering additional factors as she pleaded guilty. At the same time, employees should concern on how to confront with an ethical dilemma and the whistle-blowing protection in order to resist any illegal conduct that required by their employers.


23

CASE 3 : Accounting Fraud at WolrdCom References ATLAS, S. R. (2002, July 22). WORLDCOM'S COLLAPSE: THE OVERVIEW; WORLDCOM FILES FOR BANKRUPTCY; LARGEST U.S. CASE. Retrieved March 27, 2014, from New York Times: http://www.nytimes.com/2002/07/22/us/worldcom-scollapse-the-overview- worldcom-files-for-bankruptcy-largest-us-case.html

James Parkinson, Esq., and Lauren Randell, Esq. Buckley Sandler LLP, Securities litigation & Regulation: Fuel to the fire: Whistle-blower incentives in the Dodd-Frank Act, Publication of Thomson Reuters: Westlaw Journal (August, 2010).

Manual G Velasquez (2012), Business Ethics: Concepts and Cases 7th Edition, A Pearson publication, chapter 1: basic principles ethics in business, pages 56-61.

The Associated press, “Ex-WorldCom Accountant Gets Prison Term”, The New York Times publication (August 6, 2005): http://www.nytimes.com/2005/08/06/business/06worldcom.html


24

Worldcom

Recommend Documents