ACCT WorldCom Assignment Revision

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California State University, Los Angeles *

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4950

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Accounting

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Jan 9, 2024

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docx

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Kelechi Mbata ACCT 4950 October 23, 2023 WorldCom Assignment What are the pressures that led executives and managers to “cook the books?” Due to a variety of pressures, the managers of WorldCom cooked the books. The goal of WorldCom was to “be the number one stock on the market”. The goal of the company was to increase its revenue, which would increase its market value. WorldCom’s problems started in 2000 because of “increased competition, excess capacity, and decreased demand for telecommunications services”. WorldCom had to lower its prices to compete with its competitors, which affected its EOR. Ebbers urged executives to improve WorldCom’s performance, or else they would “lose everything”. The Chief Financial Officer (CFO) Sullivan came up with a plan to “use accounting entries” to achieve “targeted performance” and convinced/encouraged others to agree to the scheme so that the company could stay on top. Pressure from management and external forces managers to make wrong decisions. Executives wanted to ensure that the stock price would continue to rise each quarter, which would make investors happy and increase their stock as well. When executive compensation and incentives are tied to the company's finances, senior executives and management may be more willing to do the accounting and reap more financial benefits in the process. If the overall performance of the company is great, it also means bonuses and better pay for the CEO. According to the case, Ebbers had a loan of $400 million secured by a pledge of his WorldCom shares, causing pressure from the administration to show good financial results. Another critical reason that managers felt pressured to produce the books is the possibility of losing their jobs, wages and benefits if they do not cooperate with the system. The goal was to grow sales and demonstrate excellent financial health while WorldCom continued to make acquisitions. Why were the actions taken by WorldCom managers not detected earlier? What processes or systems should be in place to prevent or detect quickly the types of

actions that occurred in WorldCom There are several reasons why the unethical behavior of the management at WorldCom did not come to light. One of the primary reasons was that the culture of the company was not well defined. As one manager put it, “We didn’t have any written policies.” Ebber’s called creating an “accompanist code of conduct” “a colossal waste of time.” There was a very top-down management approach, and employees did what management said, even when it went against generally accepted accounting practices. No employees came forward and reported malpractice because there was no whistle-blower policy, and employees were afraid of repercussions and losing their jobs. Another reason is that Ebbers is the CEO and the Chairman of the Board, and there is no supervisory authority over any of his actions as CEO. The accounting team appeared to lack adequate knowledge or information about generally accepted accounting principles. They did not understand their moral duties and responsibilities as accountants. Sullivan directed his staff to identify the cost of excess network capacity and treat it as a capital expense rather than an operating expense. The chief accounting officer had previously recommended this, but it was rejected because Yates and Myers felt that GAAP did not support that method. This method was not challenged by outside auditors after Sullivan adopted it. In addition, external auditors and approach was a moderate-risk approach that also did not detect an accounting scandal. The WorldCom accounting scandal could have been prevented if they had different processes to identify and prevent management and actions. First, Ebbers had too much power. The CEO and the chairman of the board cannot be the same person. The company and its internal control were also missing, and the differentiation of tasks had to be clearly defined. The culture and culture of the company was practically non-existent and there was no continuity as the company continued to make acquisitions. The company would benefit from creating a culture based on ethics. In addition, employees were afraid to come forward; there was no whistleblowing policy to help perpetuate fraud. In the WorldCom case, auditors failed to detect Sullivan's scheme. Frauds could have been detected early if the company had a strong audit committee to assist with internal audit, internal control and relationships with external auditors. External auditors should be independent of the company and influence and should be changed every few years. In addition, the company and the accounting team must be very familiar with GAAP principles. Were the external auditors and board of directors blameworthy in this case? Why? The board and external auditors are to blame in this case. Ebbers was both president and CEO, that dual role allowed him to commit fraud at Worldcom and the board should be blamed and held accountable. The external auditors did not give a true and sufficient picture of the financial results of WorldCom.

WorldCom was treated as a moderate risk company, although auditors were not allowed full details of the company or an explanation of its methods. The external auditors did not do their job; they should be charged and prosecuted for fraud at Worldcom. Betty Vinson: victim or villain? Should criminal fraud charges have been brought against her? How should employees react when ordered by their employers to do something they do not believe in or feel comfortable doing? Betty Vinson was in a difficult position. She was threatened by Sullivan when she initially spoke out against cooking the books. Fearing she would lose her job, she stayed and participated in the fraud for over a year. Vinson should still be held accountable because she knew she was doing something wrong. Like the other managers who stayed and participated in fraud with Sullivan and Ebbers, Vinson should be criminally charged. Employees should feel secure in the knowledge that they can refuse an unethical request. However, this is not always the case. Employees can ask the manager to explain further or repeat their request to clear any confusion. The employee then analyzes the request and questions the ethical ramifications and impact. The employee must discuss the wrongdoing and consequences with the manager. The employee may or may not have a better and legal alternative solution. Suppose the manager keeps pressuring the employee to commit fraud. The employee should consider reporting the matter to the whistleblowing committee or higher management. The employee should carefully consider his options before planning. However, he should never resort to fraud to keep his job and appease his manager.

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