Business Ethics Project~World Com

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WorldCom: Can You Hear the
Lawsuits Now?
Team 8
ANISA VRENOZI
KATERINA BETA
ORTENCA HOXHA
MARVIL POTKA

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Outline
• Timeline
• A short introduction of the case study
• Key topics in business ethics
• Key players & their work position
• Critical ethical issues & ethical dilemmas
• Analysis of the main stakeholders
• Red flags
• Impact of the fraud
• Review of the solutions
• Pros & Cons of the solutions
• Final Comment

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The Rise & Fall of WorldCom

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Background Information
1983 : LDDS, Mississippi,  Bernie Ebbers
– Long-Distance telephone company
Main Strategies
Acquire small companies in the
field
Provide the service for cheaper cost per minute
for the customers
In two years, Ebbers became the CEO of the
company

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1989 : LDDS became public with the acquisition
of Advantage Companies
1995 LDDS changed his name into WorldCom
1997 : Ebbers acquired the largest players in the
industry, MCI
The list of the acquisitions by 2002 accounts for
more than 60 companies!
Ebbers “Telecom Cowboy”
Background Information

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• March 11: WorldCom receives a request for
information from the U.S. SEC relating to accounting
procedures and loans to officers.
• April3: WorldCom says it is cutting 3,700 jobs in the
U.S.
• April 30: WorldCom CEO was requested by SEC
information for his personal loans.
– Ebbers resigned and Vice Chairman John Sidgmore
assigned as CEO
The Beginning of the End 2002

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• June 25: WorldCom fires its CFO, Scott
Sullivan after uncovering improper accounting
– The company cut 17,000 jobs, more than 20
percent of its workforce.
– WorldCom admits inflating incomes by $3.8 billion
by using improper accounting of expenses.
– Stock falls to 20 cents/share.
The Beginning of the End 2002

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• June 26: SEC files civil charges of fraud against the
company
• July 21: WorldCom declared bankruptcy
• July 29: NASDAQ stock market delisted WorldCom
Inc.’s securities.
• August 8:WorldCom announces another $3.3 billion
in improper accounting discovered, bringing the
amount to a total of $7.15 billion in income inflation.
The Beginning of the End 2002

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Key Topics in Business Ethics

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Key Topics in Business
Ethics

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Transparency → One of the eight principles of Codex
(Not truthful, inaccurate records,
fraudulent actions)
Embezzlement → theft and misuse of the money of the
company
Corruption → Conscious about illegal actions used
to make personal profits.
Corporate Governance → Totally destroyed. No more control over
the operations of the firm
Key Topics in Business
Ethics

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Key players & their work position
 Bernard Ebbers → Former founder, chairman and CEO of
WorldCom (1985 – April 29, 2002)
 John Sidgmore → WorldCom’s vice chairman in charge of
WorldCom’s Internet division, UNNet; New CEO of WorldCom (May
2002 – September 11, 2002)
 Scott Sullivan → Chief Financial Officer
 David Myers → Senior Vice President and Controller
 Cynthia Cooper → Vice president of internal audit
 Gene Morse → Internal auditor, Cooper’s subordinates, an
information technology expert
 Glyn Smith → Internal auditor, Cooper’s subordinates

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Key players & their work position
 John Stupka → Head of WorldCom’s wireless division
 Buford Yates → Director of general accounting
 Jerry Jilly → Senior manager in information technology department
 Tom Bosley → Subordinates of David Myers
 Ron Beaumont → Chief Operating Officer
 Betty Vinson → Accounting department manager (former director of
corporate reporting)
 Troy Normand → Former accounting department manager
 SEC → Government Regulator
 Arthur Andersen → External Auditor

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ETHICAL ISSUES

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Unethical Accounting Procedures
Whistleblower-Cynthia Cooper

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Corporate Governance

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Corporate Culture

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Ethical Dilemma
→Accept →Do NOT accept
• Violate GAAP • Be in accordance with GAAP
• Conspire with other employees • Be not part of the conspiracy
• File false financial statements • Refuse to manipulate the financial
statements
 If not discovered:
Gain support from Ebbers &maybe
some huge benefits
 If discovered:
Put himself in risk of jail sentence
& an end to his career

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Ethical Dilemma
Investigate every single transaction Leave the fraudulent situation alone to continue to happen
Act in contrary of the orders of her boss Be part of the fraudulent actions
Respect all the accounting rules and regulations Violate the basic accounting rules and regulations
Gain respect and admiration but by threating her career Maybe some support and bonuses for her collaboration

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Stakeholders
Top Management

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Stakeholders

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External Auditor

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Stakeholders
Suppliers
Suppliers continuous complaints and later charges forced WorldCom to declare
bankruptcy since the company was not able to fulfill its obligations anymore

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Stakeholders
SEC
• Requested information relating to accounting procedures and
loans to officers.
 SEC filed civil charges of fraud against the company
 SEC revealed the fact that WorldCom had a debt of 5.75
billion dollars
 SEC proposed the implementation of Sarbanes-Oxley Act
which focused on:
- Creating and strengthening corporate controls
- Requiring enriched financial disclosures
- Creating new standards for corporate accountability
- Creating new penalties for acts of unlawful activity

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Red flags

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Red flags

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The Impact of the Fraud

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The Impact of the Fraud
BOD
Investmen
t Banks
SEC

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The Impact of the Fraud
Executives and Accounting Staff
6 individuals convicted of fraud / conspiracy / false filings
Ebbers – CEO 25 years in prison
Sullivan – CFO 5 years in prison
Myers – Controller 1 year in prison
Yates – Director of Accounting 1 year in prison
Vinson – Accounting Dept Manager 5 months in prison
Normand –Accounting Dept Manager 3 years probation
Finally, in April, 2003 WorldCom no longer existed. A year later, in April
2004 The company changed its name to MIC

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Five lessons to be learned from WorldCom
Beware of
companies that
have a corporate
culture that is
similar to a cult
Beware of the
companies that
depend on the
government for their
operations
Beware of companies
that depend on
mergers& acquisition
for financial growth
Beware of companies
that have close
relation between top
management and
BOD
Beware of
companies where
actions result in
mgmt defending
them selves in court

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Alternatives to prevent the
scandal

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THE SOLUTIONS

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THE SOLUTIONS

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Pros & Cons of the solutions

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FINAL COMMENT

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Thank You!