With Ebbers feeling the pressure to not only meet projections on behalf of WorldCom, but also the effect a downward shift in stock price would have on his personal financial future Ebbers turned to long time associates on the board for help with handling his personal debt. “Mr. Stiles Kellett and Mr. Max Bobbitt appear to have made the initial decision to use Company funds to extend Ebbers massive personal loans. Ultimately the program of loans and guarantees grew to more than $400 million, representing a substantial portion of WorldCom’s cash reserves and its net worth, had its balance sheet been accurately reported. Amazingly, at least $50 million of these loans were apparently wired to Ebbers before the board of directors as a whole was even notified.” (Breeden, 2003 p.18) It was these extreme loans and high amounts of company debt that lead to Ebbers being fired, however it did not come without an extensive compensation package of $1.5 million a year amongst other stock and leisure perks.
While still employed, Ebbers had the company continue to inflate earnings with cooked numbers, with reserve funds dwindling down “they took on more brazen efforts to inflate income by restating expenses, such as line costs, as capital expenditures” (The Big Lie, 2005) in hopes of keeping the company’s share price at a high; other measures such as overstating assets on the balance sheet by $104 Billion, estimating goodwill to be a staggering $45 billion dollars and overstating the carrying value of Property Plant and Equipment by an estimated $10 Billion dollars in 2002 were taken by Ebbers and his associates to mask what was really going on. (Breeden, 2003 p.14/15) Further investigation showed that “had the actual numbers been used instead of the cooked numbers WorldCom actually missed their earning targets eleven of the thirteen quarters between 1998 and 2002 and in four of the last five quarters prior to bankruptcy they actually lost money.” (The Big Lie, 2005)
CFO Scott Sullivan, Controller David Myers, Accounting Director Buford Yates and Accounting Managers Betty Vinson and Troy Mormand along with around 100 other lower level employees under the direction of CEO Bernie Ebbers conjured up the biggest accounting fraud corporate America had ever seen. Although to this day Ebbers maintains he had no knowledge of the fraudulent accounting practices of his company, a jury did not find this to be true. Ebbers was convicted on all nine counts he was charged with including one count of conspiracy, one count of securities fraud and seven counts of filing false statements. (Crawford, 2005). While Ebbers maintained he was innocent in the activities that occurred at WorldCom, the others plead guilty and CFO Scott Sullivan even testified against former CEO and friend Bernie Ebbers in exchange for a reduced sentence. Sullivan was charged with five years in prison, four of which was served behind bars with the remaining year being served under home confinement in Boca Raton. (Former WorldCom CFO, 2009) Controller David Myers received one year and one day in prison, 9 months of which was served. Earlier this year Myers received a government grant allowing him and “his partner to finance the purchase of a home health agency that provides care to 650 people in Mississippi.” (Braun, 2012) Accounting Director Buford Yates was sentenced to one year and one day in prison along with a $5,000 fine. (McClam, 2005). Accounting Manager Betty Vinson was sentenced to five months in prison, while fellow accounting manager Troy Mormand was sentenced to three years probation because his involvement in the scheme was less than Vinson’s. (McClam, 2005). All of these sentences appear relatively minor in comparison to the twenty five year sentence received by Ebbers, which is likely a life sentence since he was convicted at the age of 63. Jack Grubman of Salomon Smith Barney was also “fined fifteen million dollars and was banned from securities transactions for life by the Securities and Exchange Commission” for conflicts of interest regarding stock sold. (Moberg & Romar)
WorldCom’s stock price peaked at $49.91 in January 2000, the results of the fraud left WorldCom’s 2.968 billion common shares worth well under $1 each, a devastating loss to investors. Unfortunately the declined value of the shares was only the beginning of those affected by the fraudulent activity performed at WorldCom. Tens of thousands of people lost their jobs, retirement savings, and even companies that were manufacturing materials for WorldCom such as Lucent Technologies and Nortell Networks suffered “with layoffs and depressed share prices.” (Romar & Calkins, 2006) However it is believed that WorldCom’s biggest competitors AT&T and Sprint suffered the most from their fraudulent activity. In response to WorldCom’s expected “doubling every 100 days” growth rate AT&T began “backfilling that expectation by laying 22,000 miles of cable an hour!” (The Big Lie, 2005) which cost them money in both material and labour expenses, expenses that would be never be recovered in received revenues. AT&T spent many hours analyzing WorldCom’s revenue growth, margins, and cost structure yet could never quite figure out how everything was providing the results that it was. Sprints counter action was to lay off 6,000 employees and 1,500 contract workers in hopes of bringing down their cost structure to be par with that of WorldCom. (The Big Lie, 2005)
In November 2002 Michael Capellas was named CEO of WorldCom followed by Robert Blakely as CFO in April 2003, both of which were not involved with the company prior to their bankruptcy filling in 2002. (Moberg & Romar) With outstanding debt of around $35 billion they were faced with a monumental task, further investigation into the reporting of WorldCom’s assets turned up more and more discrepancies including asset misappropriation and over valuing several acquisitions leaving the total fraud at WorldCom a staggering $79.5 Billion. (Romar & Calkins, 2006)
Theoretical Analysis
There is really no place to start in regards to the internal and external control functions that were so clearly lacking at WorldCom. Ebbers was stuck in the past, running a multi-billion dollar corporation as if it were still the small LDDS company with only 200 customers it had started out with, he had no interest in incorporating proper internal controls to detect fraudulent activities likely because Ebbers did not want his own actions to be detected. Segregation of Duties would have greatly benefited the company, having more than one person overseeing important accounting duties. One of the biggest problems WorldCom suffered from was its lack of ability to integrate accounting and billing systems, however this likely aided Ebbers in his ability to hide certain transactions and accounting entries because once anyone became suspicious or asked any questions they were quickly instructed not to worry about it, as was the case with Cynthia Cooper, thankfully she went with her gut and continued to investigate after hours to avoid detection. On that topic, a fraud hotline would have also been of great service to the company. Through watching “The Big Lie” and reading numerous articles it was evident that there were a few people over the years that became suspicious of a number of different practices undergone at WorldCom, unfortunately the fear Ebbers embedded into his employees left no one feeling comfortable enough to ask any questions. In the year 2000, Ebbers paid out $238 Million in “Retention Grants” to favored executives (Breeden, 2003) undoubtedly for their compliance in the business practices of Ebbers and his top level associates. The tone at the top was basically “Do as your told or your life will be miserable” (The Big Lie, 2005) Ebbers didn’t even have staff with the experience you would expect for such a large corporation. The senior accounting, finance, and internal audit committee staff were very low in numbers, training and experience for what would be the norm in a company of this size. (Breeden, 2003)
Applying the Fraud Triangle of W. Steve Albrecht to WorldCom you would consider the three elements that would come together to motivate an offender to perpetrate fraud:
Opportunity: Ebbers had a great number of opportunities to commit fraud. Being in the position of CEO and growing the company from the ground up put him in the position to implement whatever control measures he wanted, or in this case didn’t want. What gave Ebbers even greater opportunity was working in cahoots with other top level executives such as CFO Scott Sullivan and Accounting Manager Betty Vinson, who in the end was literally making numbers up as she went to have the books convey what Ebbers wanted.
Rationalization: In terms of Rationalization no one can really know what was in the mind of Bernie Ebbers, considering he never admitted to his knowledge of the fraudulent activity there is really no explanation as to why he did what he did. It could be speculated that Ebbers lack of business knowledge lead to no integration of the many companies he was acquiring, and with moving from one acquisition to the next providing an ever increasing stock price, Ebbers was blinded by the money and ultimately cooked the books as needed when he realized he had no other option but to cover up the reality or show the companies true colours and lose everything anyway. He was naive to believe he could get away with it forever.
Pressure: Ebbers was under considerable pressure from Wall Street to meet projected earnings and constantly increase the stock price of WorldCom. With WorldCom becoming such a large corporation after starting out as just a small town company, Ebbers must have felt pressure to continue to grow and grow and grow not considering the fact that everything eventually levels out... it was inevitable that the growth of WorldCom would have to stop somewhere.
There are a number of other fraud theories that would apply to WorldCom:
Tip of the Iceberg Theory: “When first discovered, very few frauds yield their true extent, along with the actual amount of the loss” (Biegelman & Bartow p.37) Even years after the discovery of the 3.8 billion in fraudulent accounting entries by Cynthia Cooper during the post bankruptcy audit things like the overvaluing of acquisitions were still being discovered. What started off as 3.8 Billion turned into more like 79.8 Billion by the time everything was discovered.
Potato Chip Theory: “Committing fraud and getting away with is can become addictive” (Biegelman & Bartow p.37) which was clearly the case here, Ebbers had gotten away with Fraud for years before finally being discovered in 2000 and had the deal with Sprint gone forward and increased the stock price, it could have been even longer before the fraud was discovered. No one wanted to question an earning giant.
Rotten Apple Theory: This theory could have been created for Bernie Ebbers, his tone at the top was such to make money, acquire more companies, keep expenses the lowest they can possible be (having employees turn off lights when not in their office) and do whatever it takes to make it happen, legal or not. Bernie Ebbers was definitely the Rotten Apple in the basket known as WorldCom.
WorldCom Fraud Risk Analysis
Inherent Risks for WorldCom
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Multiple Billing Systems – Acquiring a number of companies all with different customer lists, billing systems and collection methods. This is an example of Operational Risk. If the customers are being mishandled or their information isn’t being protected properly it would reflect poorly on the company.
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The likelihood of confusion amongst billing systems is high. Rating 7
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The impact of a billing scandal on the company would be severe. Rating 9
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Valuation of acquired companies Assets – This is an example of Financial Reporting Risk, once the companies are acquired if the equipment and goods are not re-evaluated and confirmed that their value is as stated by the original company the discrepancies would carry over to the purchasing company (WorldCom) and therefore leave them with the misappropriated assets.
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The likelihood of misevaluation of acquired company assets is low Rating 3
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The impact of misappropriated assets on the company would be Moderate Rating 5
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New Employees – When acquiring new companies you are also acquiring their employees. People with background histories you are unaware of... they could have criminal records, history of questionable decision making, or even lack of skills to perform jobs to their new employers standards. This would be an example of an Operation Risk
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The likelihood of acquiring employees that could have a negative effect on the company is moderate Rating 5
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The impact of employees performing fraudulent activity would vary based on the level of the fraud, but could be severe Rating 9
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Conflicts of Interest – This could relate to Financial Reporting Risk, Operational Risk as well as Compliance Risk. Conflicts of interest could cause employees and or management to act in a way that may be more beneficial to themselves as an individual instead of what would be best for the company.
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The likelihood of Conflicts of Interest within the Company is moderate Rating 5
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The impact of conflict of interest situations could also vary, however not estimated as severe as other possible outcomes Rating 5
Conclusion
WorldCom went from small town to big league over the period of twenty years. It was founded under the impression it would build a customer base and then sell to make a few dollars and ended up acquiring dozens of companies and growing to be a leader in the Telecommunications sector. Unfortunately top level executive became greedy and through fraudulent accounting and many other poor ethical decisions WorldCom wrecked the industry. Many people lost their jobs, life savings and retirement plans with many top level executives ending up in prison ruining their careers and their reputations. WorldCom has become an example of all things not to do when running a company, it has resulted in many laws being passed such as the Sarbanes-Oxley Act and Bernie Ebbers was punished severely to show what will happen if fraudulent activity occurs. It is sad to see a company with such potential fall at the hand of its CEO but it is apparent that the actions of WorldCom and its executive would likely limit similar frauds in corporations around the world through fear of similar consequences.
References
Biegelman, Bartow (2012). Executive Roadmap to Fraud Prevention and Internal Control. 2nd ed. New Jersey: John Wiley & Sons. 37
The Big Lie: Inside the Rise and Fraud of WorldCom. 2005. CNBC Available:
Dennis Moberg, Edward Romar. WorldCom. Available: .
Edward Romar, Martin Calkins. (2006). WorldCom Case Study Update.Available: .
Erin McClam. (2005). Ex-WorldCom Executive Gets Year in Prison.Available: .
Former WorldCom CFO Scott Sullivan Completes Sentence. 2009.Available: http://www.securitiesdocket.com/2009/08/03/former-worldcom-cfo-scott-sullivan-completes-sentence/. Last accessed Sept 29,2012.
Greg Farrell. (2008). WorldCom's whistle-blower tells her story.Available: http://usatoday30.usatoday.com/money/companies/regulation/2008-02-14-cynthia-cooper-whistleblower_N.htm. Last accessed Sept 24, 2012.
Krysten Crawford. (2005). Ex-WorldCom CEO Ebbers guilty. Available: http://money.cnn.com/2005/03/15/news/newsmakers/ebbers/. Last accessed Sept 21,2012.
Martin Z. Braun. (2012). Obama Stimulus Aids WorldCom Felon With Health Care Loan. Available: .
Richard C.Breeden (2003). Restoring Trust. Page 17.
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llewellen_amanda (student)
