Business Ethics Project~World Com

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WorldCom: Can You Hear the Lawsuits Now?

Team 8

ANISA VRENOZIKATERINA BETAORTENCA HOXHA MARVIL POTKA

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Outline• Timeline

• A short introduction of the case s tudy

• Key topics in bus iness e thics

• Key players & the ir work pos ition

• Critica l e thica l is sues & e thica l dilemmas

• Analys is of the main s takeholders

• Red flags

• Impact of the fraud

• Review of the solutions

• Pros & Cons of the solutions

• Fina l Comment



The Rise & Fall of WorldCom



Background Information

1983 : LDDS, Mississippi, Bernie Ebbers– Long-Distance telephone company

Main StrategiesAcquire small companies in the

fieldProvide the service for cheaper cost per minute

for the customers

In two years, Ebbers became the CEO of the company



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



• 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



• 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.




• 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.




Key Topics in Business Ethics






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 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



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



ETHICAL ISSUES





Unethical Accounting ProceduresWhistleblower-Cynthia Cooper



Corporate Governance



Corporate Culture



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



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



StakeholdersTop Management



Stakeholders



External Auditor



Stakeholders

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



StakeholdersSEC• 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



Red flags



Red flags



The Impact of the Fraud




BOD

Investment Banks

SEC




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



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



Alternatives to prevent the scandal



THE SOLUTIONS



THE SOLUTIONS



Pros & Cons of the solutions



FINAL COMMENT



Thank You!
