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WorldCom Essay This paper explores the Accounting fraud that took place at WorldCom. Three aspects of the corporate culture are discussed including WorldCom’s harsh top-down management approach, the lack of written rules or a code of conduct, and the inaccessibility of many of WorldCom’s departments. The CEO’s desire to be the #1 stock on Wall Street is also discussed. WorldCom’s inappropriate booking and releasing of accruals is explored and proper accrual accounting procedures are stated. Three aspects of whistleblowing are discussed, including saving a company from a destructive end, facing public reprisal, and potential legal effects. Arthur Andersen is then used to explore the credibility of the Accounting profession when corporate fraud is unveiled. Keywords: WorldCom, fraud, accruals, whistleblowing WorldCom The corporate culture at WorldCom was one that was very loose. Although several factors contributed to the loose and unhealthy environment at WorldCom, one of the greatest downfalls of the corporate culture was the harsh top-down management approach. Employees were advised to do as they were told without questioning management. In addition, CEO Bernard Ebbers and CFO Scott Sullivan dabbled in too many affairs that should have been handled by lower-level management. Too often they ordered overrides of basic procedures that resulted in the downfall of WorldCom. Orders were issued that resulted in the override of accounting procedures. This greatly contributed to the fraud. Another factor that contributed to the unhealthy corporate culture at WorldCom was the fact that no written rules or code of conduct existed. The CEO himself thought it was a waste of time. This paired with the harsh top-down management approach seemed to create a lack of internal control as well. There were no real company rules and managers were completely capable of overriding any rules that may have existed. The inaccessibility of other departments may have contributed to the fraud as well. With so many corporate headquarters, key personnel who may have detected the fraud sooner were not able to confirm that anything wrong was taking place. If a key manager from the finance department in Mississippi, a key manager from the human resources department in Florida, a key manager from the legal department in Washington, D. C. , and a key manager from the network operations department in Texas been together at any point in time, worked together in the same building, or even had the appropriate means to communicate (cell phones were not a hot commodity like they are today and e-mail was just starting to take flight), it is possible that WorldCom could have been saved from its fraudulent end. The CEO’s desire to be the #1 stock on Wall Street was the main source of the fraud. He was so driven to be on top that he ordered managers to engage in inappropriate accounting procedures that included maintaining a certain expense-to-revenue ratio at all costs, releasing accruals, and capitalizing expenses. Furthermore, his top leadership instructed employees about what information could and could not be disclosed with the external auditors. Employees were cursed and threatened if they disclosed anything that was perceived to be a threat to his plan of being the #1 stock on Wall Street. According to Beresford, Katzenbach, and Rogers, Jr. 2003), â€Å"WorldCom manipulated the process of adjusting accruals in three ways. First, in some cases accruals were released without any apparent analysis of whether the Company actually had excess accruals in its accounts. Thus, reported line costs were reduced (and pre-tax income increased) without any proper basis. Second, even when WorldCom had excess accruals, the Company often did not release them in the period in which they were identified. Instead, certain line cost accruals were kept as rainy day funds and released to improve reported results when managers felt they were needed. Third, WorldCom reduced reported line costs by releasing accruals that had been established for other purposes— in violation of the accounting principle that reserves created for one expense type cannot be used to offset another expense† (p. 69). According to Investopedia, â€Å"†¦economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received)† (para. 1). Thus, accruals are booked when transactions occur. Accruals are released when either payment is made or when they are evaluated and deemed to be in excess of the actual accrual. Accruals of one type should never be released to offset another type. Accruals should also be released in the period they are identified. While whistleblowing may seem like a relatively easy concept to some, it really is not. The decision between doing the easy thing and doing the right thing usually is not easy. For instance, a person could report fraudulent activity that is taking place within an organization, whether it is due to corruption, misappropriation of assets, financial statement fraud, or another type of fraud. However, such a decision could carry a great price tag. Not only could it lead to the complete destruction of a company, but it could cost other employees their benefits, their retirements, and their jobs. One of the pros of whistleblowing is the fact that a company could be saved from certain destruction, as in the case of WorldCom. It is possible that the sooner fraudulent activity is reported, the less negative the outcome could be. However, whistleblowers are often perceived as tattle tales and snitches and sometimes face public reprisal, as was the case with WorldCom’s Cynthia Cooper. Another downside is the potential legal effects of whistleblowing. According to Wikipedia, â€Å"†¦most whistleblower protection laws provide for limited make whole remedies or damages for employment losses if whistleblower retaliation is proven. However, many whistleblowers report there exists a widespread shoot the messenger mentality by corporations or government agencies accused of misconduct and in some cases whistleblowers have been subjected to criminal prosecution in reprisal for reporting wrongdoing† (Common Reactions section, 4). The consequences of whistleblowing may prove to be steep. The credibility of the Accounting profession is put in jeopardy when corporate fraud is unveiled. As a result of the WorldCom fraud, Arthur Andersen was ordered to cease practicing before the Security and Exchange Commission by August 31, 2002. According to Wikipedia, â€Å"†¦the damage to the Andersen name was so severe that as of 2010[update], it has not returned as a viable business even on a limited scale. There are over 100 civil suits pending against the firm related to its audits of Enron and other companies. In addition, its reputation was so badly tarnished that no company wanted Andersens name on an audit. Even before voluntarily surrendering its right to practice before the SEC, it had many of its state licenses revoked† (Demise section, 1). As stated by Charles Niemeier (2001), â€Å"A loss of confidence can cause even a company with solid core operations to fail. That is because the negative impact of a lack of credibility can be far greater than the sum of the misstatements in the financials† (The Dangers of Smoothing section, 7). References http://www.investopedia.com/terms/a/accrualaccounting.asp http://owl.english.purdue.edu/owl/resource/560/01/ http://en.wikipedia.org/wiki/Arthur_Andersen http://fl1.findlaw.com/news.findlaw.com/wsj/docs/worldcom/bdspcomm60903rpt.pdf http://www.sec.gov/news/speech/spch529.htm http://en.wikipedia.org/wiki/Whistleblower