Title: WORLDCOM
1WORLDCOM
- Presented by
- Eric Barr
- Stephanie Jenkins
- Robert Provost
- Adam Wear
2WorldCom
- What are the facts?
- 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
3What are the Ethical Issues?
- 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?
4Alternatives
- 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
5Stakeholders
- Employees (Including Upper Management)
- External Auditors
- Shareholders of Stock
- Competitors
- Lenders
- Customers
6Practical Constraints
- 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
7Did the Top Executives Act Ethically?
- Bernard Ebbers, CEO
- 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
- 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
8Did the Top Executives Act Ethically?
- David Meyers, Controller
- 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
- Prepared MonRev and Corporate Unallocated
Schedule reports - Booked entries on the schedule and restricted
distribution
9Did the Top Executives Act Ethically?
- Buford Yates, Director General Accounting
- Participated in and encouraged the improper
accounting even though he saw no justification
for it - Cynthia Cooper, VP Internal Audit
- Uncovered the accounting fraud and blew the
whistle - Steven Brabbs, Europe Asia Executive
- Questioned unjustified entries to top exectutives
and Arthur Anderson - Refused to make the entry, but eventually did
record it through a management company adjustment
10Did the Top Executives Act Ethically?
- Delores DiCicco, VP Wireless Finance
- Refused make an entry with no support despite
heavy pressure - Troy Normand Betty Vinson
- 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
11Why Record False Entries?
- 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
12What would you have done?
13What are the facts?
- Steven Brabbs
- Vice President of International Controls in
London - One of first to notice accounting irregularities
- Notified Senior executives at WorldCom
- Notified Arthur Andersen auditors
- Refused to make the entry on the international
companies books
- Troy Normand
- Director of Legal Entity Accounting
- Warehoused balance sheet accruals
- No documentary support for any of the entries
posted to these general accounts - Initially questioned the entries
- Later thought about resigning
14What are the Ethical Issues?
- Steven Brabbs
- Should he make the entry without backup?
- Does the entry fairly represent company events?
- Who should he inform about the issue?
- Troy Normand
- Are the accruals appropriate?
- Should he have taken a stronger stance?
- Who should he inform about the issue?
15What are the Alternatives?
- Steven Brabbs
- Follow corporate orders and make the entry
- Make the entry on separate books
- Refuse the entry
- Report the incident
- Resign
- Troy Normand
- Follow corporate orders and make the entry
- Make the entry on separate books
- Refuse the entry
- Report the incident
- Resign
16Who are the Primary Stakeholders?
- WorldCom Employees
- Family Members
- Stockholders
- Creditors
- Arthur Andersen Auditors
17What are the Practical Constraints?
- Disobeying could prevent future promotions
- Difficult to identify when your boss is wrong
- Need to support a family
- Difficult to blow the whistle on something that
you are involved in
18Who Was More Ethical?
- Steven Brabbs
- 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
- Never contacted auditors
- Made non-GAAP entries to his account
- Ignored initial reservations
19Internal Auditing
- Portray the firms 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 users 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).
20Independent 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.
21Independent Auditing
- Judge Burger (Arthur Young Case, 1984)
- Examine the corporations 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.
22Operating Audit vs. Financial Audit
- Purpose of Audit
- Emphasizes effectiveness and efficiency concerns
operating performance for the future - Distribution of Reports
- Reports are intended primarily for management.
- Inclusion of nonfinancial areas
- Cover any aspect of efficiency and effectiveness
in an organization and involve a wide variety of
activities.
- Emphasizes whether historical information was
correctly reported oriented to the past - Report typically goes to many users of financial
statements. - Limited to matters that directly affect the
fairness of financial statement presentations.
23WorldComs Internal Auditors and Audit Committee
- 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 Audits staff. - Audit committee accepted proposed Internal Audit
Plan that focused on operational effectiveness
and efficiency, systems, and internal controls.
24What are the Facts?
- Salomon Smith Barney offered 1 million shares of
IPOs to WorldCom CEO - Salomon Smith Barney gave WorldCom positive
reports despite suspect financials - WorldCom CEO eventually made more than 11
million from trading
25What are the Ethical Issues?
- Bankers were selectively doling out IPO shares to
individual executives instead of the public - Financial reviews were being completed by the
same company that depended lucrative banking
business from the client
26What are the Alternatives?
- 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
27Who are the Primary Stakeholders?
- Salomon Smith Barney
- WorldCom CEO and IPO holder
- The general public
- The company offering the IPO
- Analysts in charge of reviewing WorldCom
28What are the Practical Constraints?
- Trying to maintain practical professional
relationships - Competitive environment pressures institutions to
provide incentives
29What Actions should be Taken?
- IPOs should not be given out selectively by the
bank to clients - Analyst reviews of clients should declare that
relationship
30WorldCom
- 2002 saw an unprecedented number of corporate
scandals Enron, Tyco, Global Crossing. - WorldCom went from being the nations 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.