Introduction
WorldCom was an American telecommunications company that highlighted the dangers of engaging in unethical conduct. WorldCom’s growth strategy was through acquisition of other companies. Rapid acquisition made WorldCom one of the largest telecommunications in the US. However, the company was secretly engaging in a massive accounting fraud, which created an illusion of billions of dollars in earnings. In so doing, WorldCom hid its true financial status from investors. When WorldCom filed for bankruptcy, it had accumulated a debt of $41 billion (Moyer, McGuigan & Kretlow, 2005). A series of fraudulent and unethical conduct led the collapse of the one-time telecommunications giant. Therefore, it is pertinent to say that engaging in unethical conduct ultimately harms a company.
WorldCom’s accounting fraud
WorldCom engaged in accounting fraud by reporting various expenses as capital expenditure. Listing expenses as capital expenditure enables a company to spread out the expenditure over many years. This reduces the effect that capital expenditure has on the current financial status of the company. Listing expenses as capital expenditure enabled WorldCom to overstate its income by approximately $9 billion. WorldCom improperly listed ‘line costs’ – one of its main operating expenses – as capital expenditure. This portrayed the company as profitable and concealed massive losses. Fraudulent accounting practices inflated the company’s profit, making it correspond to analysts’ estimates. In addition, inflating the company’s income enabled it to support the value of its stock (Wells, 2011).
Discovery of the financial irregularity
In 2002, WorldCom’s internal auditors discovered that the company listed $3.8 billion wrongly as capital expenditure between 2001 and 2002. Discovery of the accounting fraud made WorldCom’s board of directors fire Scott Sullivan, the company’s CFO, and other senior executives. In addition, discovery of the accounting fraud led to withdrawal of the company’s main auditors, Arthur Andersen, who had failed to discover the irregularity. Soon after the discovery of the accounting fraud, the US Securities and Exchange Commission (SEC) launched an investigation into the fraud. Discovery of the accounting irregularity led to dwindling of investor confidence, which ultimately forced the company to file for bankruptcy. SEC imposed a $2.25 billion civil penalty to WorldCom due to its accounting irregularity. In addition, the federal government launched criminal proceedings, which led to the conviction of WorldCom’s top executives (Laufer, 2008). WorldCom’s founder and CEO, Bernard Ebbers, is currently serving a 25 years sentence in prison. WorldCom’s accounting fraud made congress enact the Sarbanes-Oxley Act, which demands stringent financial reporting for all public companies.
Reasons for engaging in unethical conduct
Most of the employees of the company who worked in the accounting group at the corporate headquarters knew about the accounting irregularity. However, they could not do anything as the company had created an organizational culture where employees could not question or doubt their managers. In addition, WorldCom had an organizational culture where profits and revenue were of utmost importance, regardless of the means used to obtain them. WorldCom also limited the flow of financial information to various parties (Laufer, 2008). WorldCom’s CEO wielded so much power, making it hard to question the company’s activities.
Conclusion
WorldCom’s organizational culture and leadership contributed to its ultimate collapse. The company could have avoided its predicament if it cultivated a favorable organizational culture that facilitated information flow. In addition, the company should have empowered its employees. Empowering employees would have enabled them to question managers and leaders who engaged in fraudulent or unethical conduct.
References
Laufer, W.S. (2008). Corporate bodies and guilty minds: The failure of corporate criminal liability. Chicago, IL: University of Chicago Press.
Moyer, R.C., McGuigan, J.R. & Kretlow, W.J. (2005). Contemporary financial management. Belmont, CA: Cengage Learning.
Wells, J.T. (2011). Corporate fraud handbook: Prevention and detection. Hoboken, NJ: John Wiley & Sons.