WorldCom engaged in fraudulent accounting practices that inflated revenues and hid expenses, which ultimately led to its bankruptcy. Top executives pressured employees to manipulate financial reports in order to meet expectations. When the fraud was uncovered, it resulted in massive job losses, the loss of $180 billion in shareholder value, and damage to the telecom industry. The fraudulent culture was driven by autocratic leadership, lack of transparency, and failure of oversight by the board and auditors.

1. How
Unethical
Practices
Almost
Destroyed
WorldCom

2. WORLDCOM LEADERSHIP
CEO Bernard Ebbers CFO Scott Sullivan

3. Overview
• WorldCom Inc. began as a small
Mississippi provider of long distance telephone
service called LDDS.
• 1996: Acquired MFS Communications (internet
backbone)
• 1998: Acquired MCI
• 2000: Dotcom Bubble Burst (rapid decline in
telecom stock values)
• 2002: Accounting Fraud uncovered
• 2002: Filed for Bankruptcy Protection

4. How it started?
WorldCom and other telecommunications firms have faced reduced
demand as the dot–com boom ended and the economy entered
recession.
Revenues fall short of expectations, while debt remains.
Profits
Market value of the company’s common stock plunged from about $150
billion in January 2000 to less than $150 million as of July 1, 2002.

5. Fraud
was accomplished in two main ways:
First, WorldCom's
accounting department
underreported 'line costs’
Second, the company
inflated revenues with
bogus accounting entries
from .corporate unallocated
revenue accounts.

6. What WorldCom did?
Reduced the amount of money held in
reserve by $2.8 billion and moved this
money into the revenue line of its
financial statements.
In 2000, classified operating
expenses as long-term capital
investments ( $3.85 billion).
These changes turned
WorldCom's losses into profits.
It also made WorldCom's
assets appear more valuable.

7. How discovered?
Then Securities and Exchange Commission
(SEC) launched an investigation.
First, by WorldCom's own internal auditor,
Cynthia Cooper - uncovered $3.8 b. of the
fraud.

8. Consequences
• Stock
• Mid 1999 -$64.50 a share
• After announcement - below $1 a share
• Price fell below $1 a share ($.06) upon
news that there might be further
accounting irregularities.
• Employees
• Those who hold the company’s
stock in their retirement plans. (ESOP)
• 17,000 employees lost their jobs.

9. Consequences
• Shareholders
$180 Billion of shareholder value lost.
• Future of the company
•Their customers switch to other telecommunications
carrier.
• WorldCom was disqualified from further federal
government contracts.
•How bankruptcy would affect service to
Customers retaining WorldCom contracts is
Another issue.

10. Why it Happened?
• Corporate Culture
• Autocratic style of management and followed a top
down approach.
• Lack of courage of employees to communicate the
fraudulent activates – believed it would have cost them
their jobs
• A financial system in which controls were extremely
deficient
• The BOD and Audit Committee did not appear to have
had an adequate understanding of the company and
culture
• Inadequate audits by independent auditors

11. Ethical Values Violated
• Unethical Work Culture
• Pressuring employees to manipulate accounts
• Employees who played along were rewarded; others were
threatened.
• Fudged up the accounts; mislead the various stakeholders.

12. Present condition
The company emerged from Chapter 11 bankruptcy during 2004 with about $5.7
billion in debt and $6 billion in cash.
On August 7, 2002, the exWorldCo 5100 group was begun.
On February 14, 2005, Verizon Communications agreed to acquire MCI for $7.6
billion.
December 2005, the Microsoft announced that MCI will join it by providing Windows
Live Messenger customers "Voice Over Internet Protocol" (VoIP) service.
This was MCI's last new product—- called "MCI Web Calling".
After the merger, this product was renamed "Verizon Web Calling".

13. Legal trials

14. Bibliography
• Kaplan, R. S., and Kiron., D. (2007) Accounting Fraud at WorldCom. Harvard Business School Case
104-071, September 2007. (Revised from original April 2004 version.)
• Lyke, B. (2002). “WorldCom: The Accounting Scandal.” CRS Report for Congress, August
2002.http://www.law.umaryland.edu/marshall/crsreports/crsdocuments/RS21253_08292002.pdf
• Romar, E., and Calkins, M. (2006) WorldCom Case Study Update. University o Massachusetts-
Boston http://www.scu.edu/ethics/dialogue/candc/cases/worldcom-update.html
• American Institute of Certified Public Accountants (2005) The Worldcom Fraud
http://www.aicpa.org/InterestAreas/AccountingEducation/Resources/DownloadableDocuments/
worldcom.ppt
• WorldCom: The Case Against Bernard Ebbers
(2011)https://www.youtube.com/watch?v=DW03eVMtOY4
• WorldCom – What Went Wrong (2008)https://www.youtube.com/watch?v=7g_d-phoUrU

15. Big expectations-bigger frauds

16. The Blame Game
•Arthur Anderson was external auditor
of WorldCom since 1989.
•They denied any involvement in the
Fiasco.
•Arthur Anderson missed opportunities
where they could have disclosed the
fraud. They have been criticized for
their way of handling WorldCom
accounts books and policies.

17. Corporate Whistleblowing
 Cynthia Cooper and her team were the first people who uncovered the major
fraud at Worldcom.
 The voluntary release of non-public information, as a moral protest, by a
member or former member of an organization outside the normal channels
of communication to an appropriate audience about illegal and/or immoral
conduct in the organization or conduct in the organization that is opposed in
some significant way to the public interest.
 Traditional corporate monitoring occurs through a variety of overlapping
means, including: the company’s board of directors, external auditors and
attorneys, and the government.
 “The highest good was the good will. To act from a good will is to act form
duty. Thus, it is the intention behind an action rather than its consequences
that make that action good” – Immanuel Kant.
 As businesses continue to grow larger and more complex, whistleblowing has
emerged as a valuable tool for eliminating future corporate fraud.
 A reported 90 per cent of whistleblowers lose their jobs or are demoted.

18. THE FINANCIAL
MESS
SEC revealed the fact that WorldCom had a
debt of 5.75 billion dollar.
WorldCom has also signed a deal with 26 banks
according to which It has to pay 2.65 billion
dollar per year.
Banks agreed to give the loans without any
collateral.
WorldCom manipulated the value of its total
assets

19. Summary
• WorldCom is not only about “greed”
• Corporate fraud is the result of how a corporation is
led, how employees are motivated, the nature of the
work, and the degree of individual autonomy
• Ethics training and compliance programs don’t work
in a culture that is exclusively materialistic and that
devalues the dignity of work and workers
• The basic assumptions about how corporations are
organized and run need to be rethought
• Corporate executives must re-learn how to lead
• Leadership training must be holistic, emphasizing free
will, personal responsibility and transparency i.e.:
continuous, open, information-sharing

20. Why‘good’managersmakebadethicalchoices
Four RationalizationsTo Justify Questionable Conduct
• 1. Believe that the activity is not “really illegal”
• Top execs. seldom ask their subordinates to do things that both of them know are
against the law or imprudent. But company leaders sometimes leave things unsaid
or give the impression that there are things they don’t want to know about….often
lure ambitious lower level managers by implying rich rewards await those who can
produce certain results.
• WorldCom – top exec. Comp and benefits were extremely generous. (First Interim
Report page 63). Large subjective cash bonuses were paid. Sullivan made personal
payments to staff out of large bonus he was paid (Second Interim Report page 150).
• 2. That it is in the individual’s or corporation’s best interest.
• Need to value the “how” results are achieved not just the “results” itself. If not,
individuals will assume that borderline actions will be overlooked or at least
interpreted charitably if noticed.
• WorldCom – employees feared loss of job over blowing the whistle.
• 3. That it will never be found out.
• A major factor in the WorldCom fraud. Hoped that Sprint deal would close so they
could re-fuel reserves. Then hoped demand would pick up to use up excess capacity
and could bleed off overcapitalization against future growth. Then hoped that could
take a restructuring charge – and blame it on overall market conditions.
• 4. Believe that the company will condone actions that are taken in its interest and
will even protect the managers responsible.
• Classic case of this in WorldCom. When accounting staff began to bulk at making
improper entries. Sullivan and Myers assured them that it was ok and not to
abandon the ship during the storm.
• Need an environment of transparency that – do not shoot the messenger – that
people are not afraid to speak up – that do not hid things or problems.

21. 21
Conclusion
A good way to avoid management oversights is to subject the control
mechanisms themselves to periodic surprise audits…
The point is to make sure that internal audits and controls are
functioning as planned
It is a case of inspecting the inspectors and taking the necessary steps
to keep the controls working efficiently
It is up to Top Management to send a clear & pragmatic message to all
employees that good ethics is still the foundation of good business
• First and foremost need a proper “Tone from the Top” – without it no
system of controls will be effective.
• Need an environment where controls matter and doing business in
accordance with the law and ethically is said and practiced.
• Need to have healthy level of skepticism
• A great quote from Bankruptcy Court Report on Corporate
Governance For The Future of MCI, Inc.
• “Power tends to corrupt, and absolute power corrupts absolutely”
Lord Action 1887

22. Key Take Aways
• No job is worth breaking the law or committing unethical acts
for your personal integrity is your most important asset – you
own it and control it
What will it profit a man if he gains
the world but loose his own soul?
(Mark
8:36)Jesus Christ