ACC557 Financial Accounting
Cornelia H. Brown
Review of Accounting Ethics - Worldcom
In a business world pressured to meet organizational objectives such as high revenue growth it is not alarming that conduct by decision makers may be deemed as questionable practices. These practices within the past two decades have resulted in a number of organizations finding themselves confronted with ethical dilemmas and the aftermath of stock price declination, corporate demise and costly litigation. Worldcom is one of those organizations that found itself in this predicament as it announced filing for bankruptcy in July of 2002. (Thibodeau and Freier)
Worldcom evolved from Long Distance Discount Services (LDDS), a long-distance provider that connected calls between local telephone companies. In 1996 the Telecommunications Act allowed long-distance service providers to enter the local telephone services and other telecommunications services, such as the Internet. During the next four years the company embarked on an aggressive acquisition strategy to expand into these markets.
The acquisitions included the following telecommunication companies: MFS and UUNET (1996), Brooks Fiber Properties, CompuServe Corporation, ANS Communications and MCI (1998); Skytel and Sprint (1999). Although the Sprint merger failed, Worldcom became the second-largest telecommunications provider in the United States. During this time span year over year revenue growth was 50 percent in 16 of 23 quarters. (Thibodeau and Freier)
In 2000, Worldcom began to face challenges such as increased competition, decreased rate of growth, decline in stock prices and downturn in demand, particularly the Internet. The investment in network capacity outweighed consumer demand. The ratio of expenses to revenues increased as industry revenues and stock prices declined.
As a decision maker what takes place when faced with the dilemma of faltering as one of the top players within the industry or business world in general? According to Stephen A. Judge and Timothy A. Judge authors of Principles of Organizational Behavior, there are three types of criteria when faced with ethical decision making: utilitarianism, rights and justice. Utilitarianism is to provide the greatest good for the greatest number. This criterion tends to dominate business decision making when relating to efficiency, productivity and of course maximizing profits which correlates to Worldcom’s state. (Judge and Judge)
In spite of the telecommunications industry downturn, Worldcom continued to post impressive numbers as monthly financial statements reported positive revenue performance. However, the complete Corporate Unallocated schedule that detailed corporate level adjustments was only privy to CEO Bernie Ebbers, CFO Scott Sullivan and select employees. The revenue recorded in this schedule allowed the company to achieve double-digit growth reported between 1999 and 2001. It was later determined by investigators who found notes supporting top-side adjusting journal entries were posted to hit revenue growth targets. Actual notes and recorded messages support CEO Ebbers and CFO Sullivan’s knowledge and participation in unethical accounting practices. (Thibodeau and Freier)
The initial investigation was led by Cynthia Cooper an internal auditor who had previously contacted Worldcom’s accounting firm Authur Anderson reference an accounting issue and was undoubtedly brushed off. She and her colleagues became suspicious of peculiar financial transactions and opted to investigate. In spite of opposition, conflict and fear, Cynthia Cooper and her colleagues were undeterred in their efforts although their findings would be devastating to the company, employees and investors. Their investigation uncovered a series of clever manipulations intended to conceal approximately $4 billion in misallocated expenses and phony...