How Unethical Practices Almost Destroyed WorldCom

Group Members• Amit Yadav• Samarpal Singh• Ravindra Kumar• Apporva Verma• Saurabh Tripathi• Udit Varshney• Vimal Verma

WORLDCOM LEADERSHIP

CEO Bernard Ebbers CFO Scott Sullivan

COMPANY BACKGROUND• Worldcom founded in 1983 in hattiesburg

, mississippi• Initially called LDDS- Long Distance

Discount Service• Bernard Ebber as CEO in 1985

Growth=survival$650000=$1.5 m

• Worldcom went public in 1989• 1993-metromedia co. & resergens

communication• 1995- william technology• 1998-Biggest acquisition($40 billion

revenues)

• 1999 sprint merger worth $129 billion crashed• Stock declined by 2000• Heavy loans unstabilized his position as

he left he said• New CEO-John Sidgmore & CFO Scott

Sullivan• investigation launched by :-

SEC (Security exchange commission)

Internal auditor • Purchased by Verizon communication on

2001 known as Verizon business.

• Unrealistic financial targets and inability to meet them

• Recording of a/c entries without any evidences• Company was capitalizing its line costs. Line

costs were operating expenses but classified as capital expenditure

• False figures 3.055 Bn $ in 2001 & 797 Mn $ in 2002

• In 2000 and 2001, WC claimed pre tax revenue of 7.6 and 2.4 Bn $ respectively. Later discovered as loss of 49.9 and14.5 Bn $ for the respective years

• Reserve accounts were manipulated to increase figures

• Two versions of accounts the actual version and the Final version for investors

Truth Behind the Scandal

Nemesis catches up with world com

• Attempt to acquire sprint in oct 1999 but failed.• Ebbers lacked strategic sense of direction and

company started drifting.• A company suffered financial crunch because of

decline in revenue,over capacity and huge debts.

• Fear amongst CEO and the top brass of the company.

• Stock price dropped to 0.5 $ in jan 2002.• In june 2002,co. announced inflation of profits

and improper accounting of 3.9 Bn$.• In august 2002,another 3 Bn$ was improperly

accounted.

Why WorldCom failed????

Reasons for the fiasco

Corporate cultureVariety of peopleAcquisition of various business entitiesDepartment were distant from each otherHierarchical nature of the organization

Inorganic growth

Acquisition of business unitsFinanced by companies high value stockIndustrial slow growth rate and recession

Failing leadership

No technical qualification , no experiencePriority to personal interest over organization's interest.No backup plan

Unconcerned and Malfunctioning Board of directors

Unalert top managementWhimsical CEOLarge pay packages of top executivesUnreasonable long tenures of board membersUnreasonable loans and benefits given to Ebbers

Other reasons

Recession of the economyVast oversupply of capacityUnhealthy focus on profits

THE FINANCIAL MESSSEC revealed the fact that WorldCom had a debt of 5.75 billion dollar.WorldCom has also signed a deal with 26 banks according to which It has to pay 2.65 billion dollar per year.Banks agreed to give the loans without any collateral.WorldCom manipulated the value of its total assets

WorldCom also defaulted to give 0.60 dollar on its MCI group tracking stock.

This step was taken by WorldCom stating the fact that by this it can save upto 284 million dollar a year.

How the stakeholders were affected?

Decline the value of stock

Workforce cut down drastically

Customer

Financial institutions

The Indian connection

The Blame Game

• Arthur Anderson was external auditor of WorldCom since 1989.

• They denied any involvement in the Fiasco.

• Arthur Anderson missed opportunities where they could have disclosed the fraud. They have been criticized for their way of handling WorldCom accounts books and policies.

• Arthur Anderson had series of audit fraud including Enron and WorldCom.• Observers commented that

Arthur Anderson could have paid more attention towards aggressive practices when it was aware of such practices before.

Summary• WorldCom is not only about “greed”• Corporate fraud is the result of how a

corporation is led, how employees are motivated, the nature of the work, and the degree of individual autonomy

• Ethics training and compliance programs don’t work in a culture that is exclusively materialistic and that devalues the dignity of work and workers

• The basic assumptions about how corporations are organized and run need to be rethought

• Corporate executives must re-learn how to lead

• Leadership training must be holistic, emphasizing free will, personal responsibility and transparency i.e.: continuous, open, information-sharing

21

Why ‘good’ managers make bad ethical choices (

Four Rationalizations To Justify Questionable Conduct

1)Believe that the activity is not “really” illegal

2)Believe that it is in the individual’s or corporation’s best interest

3)Believe that it will never be found out

4)Believe that the company will condone actions that are taken in its interest and will even protect the managers responsible

22

Conclusion

A good way to avoid management oversights is to subject the control mechanisms themselves to periodic surprise audits…

The point is to make sure that internal audits and controls are functioning as planned

It is a case of inspecting the inspectors and taking the necessary steps to keep the controls working efficiently

It is up to Top Management to send a clear & pragmatic message to all employees that good ethics is still the foundation of good business

Key Take Aways

• No job is worth breaking the law or committing unethical acts for

• Your personal integrity is your most important asset – you own it and control it

What will it profit a man if he gains the world but loose his own soul?

(Mark 8:36)Jesus Christ