Table of Contents
Introduction....................................................................................................................... 1
Question 1 .......................................................................................................................... 2
Question 2 .......................................................................................................................... 4
Question 3 .......................................................................................................................... 6
Question 4 ........................................................................................................................ 10
Question 5 ........................................................................................................................ 16
References........................................................................................................................ 24
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
Conclusion
Pressures such as meeting market expectation, economy recession and intense
competition within the industry has lead executives and managers to cook the books.
It
Earnings Management
is
strategy
management
influence
of
or
used
a
Fraudulent reporting
by
company
manipulate
the
to
reported
such
accelerating
as
expense
deferring
or
or
revenue
transactions.
reporting
consists
of
usually
management
of a company.
financial
structuring
reporting
transactions
and
to
in
alter
stakeholders
about
the
They are
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 companys 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 companys earnings.
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.
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
Were the external auditors and board of directors blameworthy in this case? Why
or why not?
Analysis of Issue
External Auditor
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
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.
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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
companys 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 Ebberss business activities which are not related to WorldCom where
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In addition, the Board ratified and approved the compensation committees 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 Ebberss 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.
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 companys 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
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
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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
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 WorldComs 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 Sullivans 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.
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responsibility
elements
Causality
Knowledge
17
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
that
indicate
culpability
Intention
Professional offending
noncompliance
with
US
GAAP
as
stipulated.
High level of profit from the offences
However,
she
does
receive
an
19
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 IFACs 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 thats unmistakably
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21
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.
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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
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
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