In the late 1990s, the communications industry started to decline, taking WorldCom stocks with it. Bernard Ebbers, the former CEO, was under intense pressure from the banks to retain the company’s good performance. The company’s progress was also in jeopardy as it had been forced to reject a proposal to merge with Sprint, another telecommunications company. However, Ebbers negotiated with the board’s directors and obtained money from the company to the tune of 400 million dollars. He aimed at covering the margin calls, but this scheme was unsuccessful. He was fired as CEO in 2002 (Jennings, 2012).
At the beginning of 1999, some members of WorldCom began using dubious methods to bring up the price of its stocks. They altered its profitability figures, among other things, to make the company seem valuable and profitable. This amounted to fraud, which is revealed in two main ways (Markham, 2005). First, WorldCom’s financial reports indicated lower expenses compared to other companies in the same business. Secondly, the reports showed substantial amounts of revenue that were sourced from undisclosed resources within the company.
The unethical activities being carried out in the company were first detected by the company’s internal auditors. They uncovered the 3.8 billion dollars fraud. The company reacted to the discoveries in various ways; some of its high-ranking members were fired while others resigned from their duties. It was later discovered that the company’s asset base had been increased fraudulently by 11 billion dollars (Albrecht, 2012).
On July 21, 2002, the company filed for bankruptcy to protect itself from its creditors. The company owed its creditors 5.7 billion dollars and they are still waiting to be paid. This is one of the worst fraud cases in the record of America and most of the world (Jennings, 2012). On March 15, 2005, Bernard Ebbers was found guilty of several counts among them fraud, and he was sentenced to 25 years in prison. The other officials involved in the scandal were also lined up for their hearing and sentencing. This paper intends to look at what led to the scandal, the ethics involved, violated, or lessons learned from it.
What is ethics and why ethics in accounting?
Ethics is the set of rules governing the conduct of business and other relations in a society. Ethics is also used in society to determine what is good or wrong. In a business environment, ethics assists business people to conduct themselves in a manner suitable for their businesses, the public and to create a solid reputation for the product and business. Many people in this field of business are faced with challenges that test their ethical values as will be seen in the analysis of WorldCom.
Accounting professionals are required to provide their services professionally and ethically. This ethics is not just acquired by individuals, – they are taught to people. A person who occupies a leadership position has to exhibit good, ethical values. These values should be passed down to those holding lower positions. The WorldCom fraud is an example of poor ethical values that leaders pass down to those in lower positions (Fernando, 2010). From the scandal and the trial that followed, we learn a lot about ethics, and how such companies are run. More light will be shed on a few things, which one learns from it.
The company was operated as a society instead of a business. Ebbers was a leader who behaved like a despot. He did this with the assistance of CFO Sullivan. The two-run the company together and demanded 100% loyalty from the company’s employees, and their authority was not questioned. This, according to ethical values should not be practiced in any business. It was one of many unethical practices seen in the WorldCom scandal.
The men ruled the company like theirs. The employees could not sell their shares or stocks, and each of them received free stocks to secure their allegiance to the two. Employees who deviated from the expected code of conduct found themselves in serious trouble with the two ‘rulers’. Being fired was one of the most common forms of punishment that the employees got.
Their influence over the employees resulted in alterations in the company’s financial records. The employees were made to believe that they were protecting their shares. According to the subordinates, their two perfect bosses approved the work they did. This allowed the practice to carry on for a very long time, and many members of the company were involved.
From this, we see that rules are operating to allow the free flow of information from the companies to the shareholders and other stakeholders. These rules operate to avoid incidents like the one above, where only two people run and manage the finances of thousands of shareholders. This is often done without their consent or involvement in the matter (Fernando, 2010).
The second thing observed and needs to be looked at is
WorldCom and many more companies had invested a lot of time and energy into looking for elected officials from the government to assist in the running of the company.
In the beginning, the company benefited a lot from rules that were made in its favor. Changes in the rules were introduced and they saw the company out of the market. People investing in companies should be thoroughly informed about the companies to which they channel their investments. In addition, they should make sure that they are not under government policy or rules. The Telecom industry has for a long time favored large companies that can provide a fixed price over a massive customer base. Nevertheless, with the reforms in the industry new laws were enacted to promote open market and competition among telecom companies. This made little economic sense. A big number of underdeveloped companies ventured into the market and there was an overflow. This led to the collapse of many companies (Monks and Minow, 2008).
There is no doubt that M&A is a lawful way of ensuring company growth. However, a company like WorldCom that did almost 70 deals in less than five years put its efforts into acquiring more companies for its expansion. This means that the company is not strong in other fields which can be exploited to expand the company or make it grow much further.
This means that if the M&A machine fails, the company will just collapse or fall into deep problems as was the case in the WorldCom Company. Moreover, the accounting methods and operations used in the M&A method are hard to ascertain and compare developments over the year.
Shares need a lot of attention to enable substantial progress; this is to ensure that there is a potent closing price of the stock. This makes investors and the employees happy. The same care should be taken when approaching the leading companies as well. Companies that come up with plans to beat rivals and take them over should be thoroughly questioned. This should be for ascertaining the means they will use to achieve the outstanding results they promise. This will enable the investors to know if the business will succeed or fail and make them avoid it or invest.
In addition, investors and bankers are required to carry out their work to appropriate levels of thoroughness to prove their worth. The independence that they are awarded is to enable them to work without interference in their duties as expected. Again, this means that they can alter whatever records they wish. To ensure that does not happen, transparency is emphasized to provide necessary information to interested parties and other stakeholders (Fernando, 2010).
WorldCom problems did not only reveal the greed that was lodged deep within the company, but also the unfortunate culture that was planted in the workforce by the people in control of the company. It did not practice any appreciable value ethics to govern its day-to-day work. Employees were paid to ensure they remained dependent on their bosses and not to make any informed decisions of their own. The people that were running the company used to power and their positions to dispose of any employee who did not play by the rules. This shows the leadership and ethical values that were in place in the company and shed light on the failure of the said company.
We also discover the involvement of politics in the company. Rules and laws were enacted to favor a certain company to thrive and make it prominent in the market. This means that laws are subject to changes as politicians leave office and others take over. When a politician pushing for the passing of a certain law leaves office, others come in and they have different ideas and interests. These changes affect the business of the affected company. By so doing, the company that was favored does not observe transparency in its dealings anymore. There are politicians involved in the companies’ affairs and formulate laws to favor some, not all.
The serious lack of efficient management and proper control of the company can be established. This can be seen where only a few individuals run an institution and cover up their shortcomings using other hard-working employees. The lack of control and administration skills or mechanisms comes at a great cost in the scenario. The company collapsed was seriously in debt and faced many lawsuits. Without proper administration, the investors cannot be adequately informed on the progress and be advised accordingly on the steps to take next. This leads to events such as what happened in the WorldCom matter (Fernando, 2010).
The lack of proper running of the company affects the functioning of its main organs. This can be rectified and changed, but only when the one responsible for the happenings is apprehended and made to pay for his/her wrongful deeds. An example set in the WorldCom case was the sentencing of the then CEO among others (Monks, & Minow, 2008).
Methods that can be used to prevent future occurrences
Incorporate governance, the board needs to operate with the investors’ best interests at heart. For that reason, it should be truly independent of the CEO of the company. The practice of the CEO and the board members being friends and influential upon each other is outdated and should not be maintained. Again, it does not mean that the board should not have any influence on the running of the company. It should question decisions made by the management team and dismiss them if they are not ethical or acceptable. There should be a competent board in place rather than a board that succumbs to the CEO’s pressure and whims. For this to be practicable, the board should be highly independent of the CEO or the chairperson. The duties of the two should be separated to have them work individually and independently.
To make sure that there is proper accountability in the company, its officials should be required to provide truthful information when it is needed. The investors should also play a part in the running of the companies. Where there are nonperforming companies, the investors should have a seat on the board. In addition, the members should have all relevant information provided to them on the cause of the failures within the company. In such situations, the investors should be capable of choosing their directors whom they deem fit to handle the problem and rectify it accordingly. In addition, when things are not done well, the investors should kick in and take over. This may lead to a few people losing their jobs, and this prospect forces them to work ethically to ensure the company’s success.
The directors that were in place or running the company during the time the then CEO was working had a chance to come in and correct the problems but did not.
The court that heard the matter said that it was a pathetic example of corporate governance. The company had little corporate governance if any. The court went ahead and appointed directors to rectify the problem. On thorough investigations on the matter, a few recommendations were made on the ways of correcting such issues and preventing their subsequent occurrence.
There should be a culture, where the advice of professionals is listened to and followed as should be.
The company should formulate a clear policy on how employees should air their views and concerns on the running of the company.
For the company to attain its goals, it needs to follow all the rules and regulations it has put forward.
With the above suggestions followed to the letter, the company will run without any such problems.
It is critical to acknowledge that, when the suggestions will be adhered to, then we will be sure that such issues will be no more within companies, and more good ethics and moral values will be practiced in these companies. The scandal should act as an example to other companies guiding them to work properly and meet their goals. A lot has been learned from the matter leading to various changes in the legal system by the introduction of new laws that will govern the companies and their employees.
Albrecht, W. S. (2012). Fraud examination. Mason, OH: South Western, Cengage Learning.
Fernando, A. C. (2006). Corporate governance: Principles, policies and practices. New Delhi: Pearson Education.
Fernando, A. C. (2009). Business Ethics: An Indian Perspective. Prentice Hall.
Fernando, A. C. (2010). Business ethics and corporate governance. Delhi: Dorling Kindersley (India), licensees of Pearson Education in South Asia.
Jennings, M. (2012). Business ethics: Case studies and selected readings. Australia: South-Western, Cengage Learning.
Monks, R. A. G., & Minow, N. (2008). Corporate governance. Chichester, England: John Wiley & Sons.
Markham, J. W. (2005). A financial history of modern U.S. corporate scandals: From Enron to reform. Armonk, N.Y. [u.a.: Sharpe.