WorldCom used typical accounting fraud to show a profit of $ 1.4 billion in the year 2001 as against a real loss (USAToday, 2003). There were different items of costs that were classified by the company as long-term investments instead of deducting them from revenue. Apart from the accounting fraud, there were other factors like corporate culture, pressure on accountants to book and release accruals, and the desire of the CEO to make the stocks of the company number one in Wall Street which also contributed to a fraud of considerable magnitude. This paper presents some of the connected issues.
The foremost aspect of corporate culture that contributed to the accounting fraud at WorldCom is the attitude of the organizational members at all levels to follow the principle of not questioning the superiors but simply following what the subordinates are told to do. Employees were of the view that they did not have any independent outlet for letting out their concerns about the policies of the company or the behavior of the executives. Many of the employees were unaware of the existence of an internal audit department and they did not believe that the internal audit department was a functional division to question the veracity of the financial transactions. There were no objections raised by the HR department for irregular salary revisions, bonuses, and other rewards to certain employees especially in the finance, accounting, and investor relations departments.
CEO s Desire to be the # 1 Stock in the Wall Street
With the rapid increase in the business, WorldCom focused mainly on increasing the revenues by whatever way possible, as CEO Sullivan believed that it was the only way to keep the stock of the company as number one on Wall Street. Therefore there has always been a thrust on revenue growth in every activity of the company. The CEO pushed the managers to spend whatever is necessary to bring revenues to the company even if the long-term costs of a project are much in excess of short-term gains from the project. All were done only with the increase in revenue in focus for keeping the number one position of the stock.
When the industry conditions started deteriorating in the year 2000 with stiff competition, overcapacity in the industry, and the reduced demand for telecommunication services because of the start of the recessionary conditions and as after effect of dot.com bubble, WorldCom found it difficult to maintain the most important performance indicator of line-cost expenditure to revenues. While the expenditure to revenue (E/R) ratio was 42% in the first quarter of 2000, the company was unable to maintain it in the subsequent periods. With the decline in business operations, the CEO decided to use accounting entries to achieve the targeted performance so that the stock value will be maintained.
Pressure on Accountants
The accountants in WorldCom were pressured to release $ 828 million of line accruals into the income statement. Though the accountants refused to do this on the plea that it was not good accounting practice, their boss assured them that such incidents would not repeat. The accountants considered resigning from their positions. However, CEO Sullivan convinced them that he would take the responsibility for such decisions and made them stay with the company. While the accountants were in doubt about these accounting practices, they also felt that the CEO would know what he is doing. The next predicament came to the accountants in the form of instruction from the CEO to transfer $ 771 million from line costs to capital expenditure for the second quarter of 2001.
There was the need to make such entries throughout the year 2001 to supplement the revenues. However, the accountants stopped the practice after they have wrongly accounted for the expenditure as an investment to the extent of $ 818 million during 2001. Generally, the accountants would have resisted such practices and exposed the CEO and the executives who pressurized them to indulge in such wrong accounting practices, irrespective of any consequences to their employment or earnings. That would have saved considerable sums of money for the investors.
Pros and Cons of Whistle Blowing
One may have to face the implications of breaching the trust among the employees of an organization if he/she decides to expose any frauds or malpractices. Secondly, there are chances that the person blowing the whistle may become an enemy of the wrongdoer (UniversityofLethbridge, 2003).
On the positive side, there is the distinct possibility of acting in the public interest to avoid unnecessary financial losses to innumerable investors who innocently deal in the shares of unethical corporations.
The credibility of Accounting Profession when Corporate Fraud is Unveiled
It is nothing but natural that the credibility of the accounting profession will be affected to a large extent when corporate fraud is unveiled. However, the circumstances under which the accountants had to involve them in the accounting frauds need to be evaluated before blaming the accountants or the accounting profession. Generally, such type of accounting frauds is committed by only a few greedy accountants who are the black sheep in the profession. The whole profession cannot be evaluated and branded based on the acts of such individuals.
UniversityofLethbridge. (2003). Business Ethics – Chapter 1 Whistle Blowing. Web.
USAToday. (2003). Accounting Fraud. Web.