Worldcom Fraud Scandal: How It Failed

WorldCom Fraud Scandal: How it failed

WorldCom, the country's second largest long distance telecommunications company, is known for one of the prevalent business scandals in U.S history. Under the leadership of Bernard Ebbers (CEO), Scott Sullivan (CFO), David Myers (controller) and Buford Yates (Director of General Accounting), in 2002 the U.S Securities and Exchange Commission (SEC) charged the company with a substantial accounting fraud. The discovery of the fraud was by WorldCom's own in-house audit department. WorldCom confessed to exaggerating the company's earnings in 2001 and the first quarter of 2002 by more than 3.8 billion. The deception was accomplished in two ways. First, WorldCom's accounting department underreported 'line costs' (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheets rather than properly expensing them. Second, the company inflated revenues with false accounting entries from 'corporate unallocated revenue accounts' (WorldCom Scandal, 2007). According to preliminary accounts, the treatment of the line costs as capital expenditures was exposed by WorldCom's internal auditor, Cynthia Cooper, May 2002. The auditor discussed the misclassification with the chief financial officer Scott Sullivan and the company's controller David F. Myers. They both were asked to validate this action and after an extensive investigation Scott Sullivan was dismissed from WorldCom and David Myers resigned (Service).

Throughout the examination of Organizational Behavior and principles of management and leadership, the following paper discusses how the WorldCom collapse could have been predicted, as well as why it failed.

Leadership and Management

The Committee of sponsoring Organizations known as COSO defines internal control as a process, effected by an entity's board of directors, management and other personnel. This process is designed to provide reasonable assurance regarding the achievement of objectives in effectiveness and efficiency of operations, reliability of financial reporting with applicable laws and regulations (COSO). Several individuals in the financial and accounting departments, at many levels of the company became aware in varying degrees of senior management's misconduct. If there was proper internal control in place and had one or more of these employees come forward earlier and raised their complaints with any of the appropriate departements then perhaps the fraud would not have gone on for so long. Internal control is a is not merely documented by policy manuels and forms. Rather, it is put inby people at every level of the organization. So why did they not report there concerns? The answer seems to be partly because of the culture deriving from corporate headquarters that emphasized making the numbers above all else; keeping financial information hidden from stakeholder; blinding trusted senior officers even in with indications that they were acting improperly and not having any outlets through which employees believed they could safely raise their objections.

Following WorldCom's fraud scandals research have established that Bernard Ebbers (CEO) and Scott Sullivan (CFO) and other executives in the organization created an organizational philosophy, or culture in which leader and managers were not to be questioned.