After the failure of WorldCom, the company declares bankruptcy in 2002 and the organization combine loss was equal to $73.7 billion (figure one depict the settlements in WorldCom’s security class action suits). The organizational behaviors or the “impact that individuals, groups, and structure have on behavior within organizations” (Robbins & Judge, 2011) of the company contribute to the failure of WorldCom, because senior management failed to develop a cooperative mentality within the different entities of WorldCom. The company closed several of MCI service centers to open 12 additional centers however, the additional centers were duplicates and ineffective.
Figure 1. Plotting of the settlements in WorldCom’s securities class action suit.
Accounting
The company was in violation of the general accepted accounting practices (GAAP) because of irregularities in their accounting disclosures as an example identifying capital expenses as operating expenses. The $341 million loan approved for Bernard Ebbers by the board of directors raised ethical questions regarding the company because “A large loan to a senior executive epitomizes concerns about conflict of interest and breach of fiduciary duty” (Moberg & Romar, 2011) as stated by Seth Taube, former security and exchange commission official. Therefore, the board of director shared the blame for WorldCom’s failure because it clearly shows severe corporate governance failure. Additionally, the ideology of the Chief Executive Officer Bernard Ebbers, the Chief Financial Officer Scott Sullivan, and the company unethical behavior and fraudulent activities contributed to the corporate governance failure as well.
Imbedded Culture
Employees and investors looked for accountability regarding the failure of WorldCom, what contribute to the fraud, and the extent of time that transpired during the fraud. Groupthink can explain many of the issues and dishonest activities within WorldCom organization.
Groupthink
Groupthink is a “kind of thinking in which maintaining group cohesiveness and solidarity is more important than considering the facts in a realistic manner” (The University of Twente, 2010). Within the organization of WorldCom existed a culture focus on teamwork and working in collaboration with others. However, teamwork and collaboration at WorldCom created a scheme for a handful of executives to commit fraud for their own personal gain. Consequently, executives at WorldCom were under pressure to maintain the cash flow the company was familiar with or EBIDTA (earnings before interest, depreciation, taxes, and amortization) even though the telecommunication services provide by the company was declining.
The groupthink behavior at WorldCom depicted an invulnerability behavior among the executive staff because they were optimistic and willing to assume the risks. However, during the time of the fraudulent events “one manager wrote an email to her employees referring to some of the irregular accounting charges” (Scharff, 2009). However, one of the employee send another email back to the manager stating in a humorous manner, he send the email to Arthur Anderson the WorldCom external auditor. This behavior was an indication many of the employees at the company believe they were invulnerable to their fraudulent action. In addition to invulnerability, the company showed poor decision-making in their rationalization by justifying their behavior. Several of the employees in the financial and accounting department rationalize that Scott Sullivan the CFO of the company had found in the general accepted accounting practices a loophole to justify the entries he was authorizing.
Furthermore, the fraudulent accounting practices Ebbers and Sullivan conducted was questionable transactions as an example “over an eighteen month period ending in 2002, Ebbers gave Ron Beaumont, WorldCom's ex-Chief Operating Officer (COO), a total of $650,000. Sullivan wrote personal checks to seven of his managers giving them $20,000 each by writing one check to the employee for $10,000 and another to the employee's spouse for the same amount” (Scharff, 2009).
Additional indicator of the company groupthink was the morality and cohesiveness of the group. The company attempted to establish a code of conduct however, the Chief Executive Officer Ebbers describe the process as a “colossal waste of time” (Scharff, 2009). Despite Ebbers views regarding the code of conduct and the deficiency internal audit processes, the implantation could have prevented many of the fraudulent event at WorldCom.
Conclusion
Nevertheless, WorldCom was a cohesive organization; therefore, the failure of the organization was the inability of the executives to express their dissatisfaction with company business decision-making because of groupthink. When companies hire leader in the organization they need to ensure leaders will delay making quick decision, respond adequately to economic pressure, and create a positive work environment. Providing an internal advisor for employees to contact secretly to assist with reporting unethical issues will ensure or minimize many of the fraudulent activities observed in WorldCom
References
Moberg, D., & Romar, E. (2011, July). The Markkula Center for Applied Ethics. Retrieved from http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html#t
Robbins, S. P., & Judge, T. A. (2011). Organizational Behavior (14th ed.). Upper Saddle, NJ: Prentice Hall.
Scharff, M. M. (2009, Spring). Understanding WorldCom's accounting fraud. Retrieved from http://www.entrepreneur.com/tradejournals/article/132353947.html
The University of Twente. (2010, September). Groupthink. Retrieved from http://www.utwente.nl/cw/theorieenoverzicht/Theory%20clusters/Organizational%20Communication/groupthink.doc/