Accounting Fraud at WorldCom

The Case of Accounting Fraud at WorldCom

In the contemporary world, many businesses continue to fall victim to fraud as many of the employees are increasingly becoming untrustworthy. Workers commit fraud individually or in a group and share the loot afterward. The vice is responsible for economic loss both in the affected firms as well as in the national economy as a whole. Many organizations continue to operate at losses due to the employees that steal the funds, and this pushes some of the businesses to the total bankruptcy.

An act of fraud mostly occurs in the accounting department whereby the accountants manipulate records to conceal their secret deeds. The problem, therefore, triggers intensive auditing in firms to identify or prevent the issue. This essay seeks to examine the case of accounting fraud at WorldCom, and the focus is centered upon the normative analysis, causal analysis, and recommendations. The causal analysis will cover the difference in authority and consider long-term consequences as well as attachment, and approval.

Fraud is an offense that comes as a result of false information presented to the relevant authority. The practice is unethical as it gives a wrong reflection of the company’s or organization’s financial capabilities as well as its progress. At first, the malpractice may seem to be the best action to take so as to save the company’s reputation and give it some advantages over the competitors but in the long perspective, it brings negative effects on the entire system. In most cases, malpractices start with a single individual and his/her influence, then they are gradually passed to the other employees and after a certain period of time, it becomes embedded in the organization which determines the organization’s culture.

Just in the case of WorldCom, professional misconduct started as an idea of a single individual named Ebbers who was the Chief Executive Officer (CEO) of the company and had a commanding voice and a certain degree of control over what should be done (Kaplan & Kiron, 2007). However, this did not benefit the company as it finally led to its bankruptcy. This essay aims to analyze Accounting Fraud at WorldCom. It covers normative analysis, causal analysis, and recommendations.

Normative Analysis of Accounting

It is evident that most of our decisions are affected by others, and this means that even matters of fraud is no exception. The Accounting Fraud at WorldCom did not happen as a result of the actions of single individuals, but rather due to the differences in attitudes and spread of the unethical culture within the organization. For instance, the principal at WorldCom – Ebbers appears to advance unethical practices in the organization hoping that the dangerous trends that are registered in the company’s progress will have a positive impact. He is blinded by the idea of being on the top on the Wall Street chart so that the corporation value can soar higher and higher. As a company’s principal, Ebbers cooperated with other officers that he had influenced. They include Sullivan who is Chief Financial Officer, Myers – the controller, Yates – the Director-General Accounting as well as Normand – the Director-General Legal Equity Reporting (Kaplan & Kiron, 2007). All of them work as agents who eagerly accepted the unethical demands presented by Ebbers.

The fraud was done in a well-organized manner where the involved people strictly adhere to the conspiracy. They did this immoral act for various reasons, which are mainly connected with the need for acceptance.

In such a way, the individuals failed to fulfill the social responsibility they had to shoulder (Sherman, September 12). In this case, the organization is not merely supposed to be concerned about the profits and its wellbeing but also the welfare of society and stakeholders. Therefore, this is ethically wrong as individuals like Normand performed according to the instructions they were given, although knowing very well that they violated their work ethics. They had a mandatory duty to enhance operational responsibility in which they had to give a fair judgment of their accounts so that their reports can be accounted for the prevailing economic conditions. This will help the stakeholders to track the real value of their shares and decide on whether to sell.

By means of the false figures, the organization destabilized another group by stating that their organization had numerous mistakes, while in reality, it was the market environment that has changed dramatically. It also violated the citizen’s responsibility in which the organization is supposed to enhance global sustainability. With the help of the doubtful activities, the organization disseminated untrue information to the environment that could not promote sustainability, since another group would respond to the WorldCom performance and not to the market demands. Similarly, the shareholders would have made a successful decision on what to do with their shares in the company if they had known its financial position and thus helped them prevent the massive losses at the end. Regarding the debate between Friedman and Mackey, I will agree with Mackey in a sense that the company has the responsibility that was not compelled, but quite ethical in nature, so that it will help the stakeholders to reach sensible decisions (Sherman, September 12).

Other behaviors will most certainly lead one into engaging in unethical practices. They are psychological in nature and relatively hard to resist since on the individual level people are influenced by others’ behavior (Sherman, September 19). Similarly to Normand, it is typical for people to accept the ideas of others during the crisis solely on the condition that they are more experienced. For this reason, Normand feels that Sullivan may be right when instructing him on how to falsify both the accrual releases and expense capitalization. Additionally, the desire to be accepted plays a vital part as it is evident that Cooper does not feel comfortable with the unethical practices being adopted but has to join the group to become a real part of the organization. Furthermore, owing to the top-down hierarchy the orders are not questioned. Whatever the superior directive is, it is expected to be done without questioning.

Causal Analysis

Attachment and Approval

Attachment is the situation where an individual is only allowed to perform by the organization, but is not necessarily the employee of that organization and thus will try to play for the firm so that he/she can build a good rapport (Sherman, September 19). For instance, the auditors are hired by the business they audit and, therefore, would want to give a review that is favorable to the organization so that they please the company and avoid the risk of being fired. Another example is Arthur Andersen who is the firm external auditor.

He feels that he is a long-term member and would like to make an impression of a committed member by ensuring that the client’s needs are adequately met. Approval, on the contrary, occurs when one already takes a stand and aims to answer the questions. In this case, Anderson relied on the secondary data and, consequently, waited for any discrepancy to be revealed, but when the information was pertinent and consistent, there was no need for further investigation of the report. This is the situation that has led to the bankruptcy of WorldCom to some extent since sound advice from Anderson concerning the exact position of the company would have helped to make the right decisions that could have saved the organization from collapse.

Deference to Authority

Respect for authority is the key flow of information in an organization, and this determines how the team runs. Most companies find the downside more appealing as compared to the upside. This is because the advantages seem to involve numerous questions and this can hinder the progress, while the disadvantages apparently do not have regard to the ethical consequences. For example, at WorldCom downside, such a system is used, due to which Normand and other employees are supposed to conform with the instructions as stated without any doubts. Basically, when Cooper questions the $400 million transfer from Anderson, the information is withheld with Anderson saying that he only takes orders from Sullivan (Kaplan & Kiron, 2007).

This means that he will be ready to take any action without ethical considerations as long as they originate from a superior authority. In the same way, the norm of reciprocity is believed to have influence in the fraudulent activities of the organization, where most of the employees from the financial department are awarded the pay rise to hide the immoral activities. This is evident as Vinson was awarded roughly $80,000 (Kaplan & Kiron, 2007) so that she does not pose a barrier to the intended operations.

Discounting of Long-Term Consequences

This is a tendency in which the accounting decisions are to be taken care of based on the cost and reward. The cost is seen as the short-term impacts, while the rewards are the long-term effects and they are essential for the organization regardless of the management’s point of view. For instance, it is clear that the WorldCom is being salvaged through the malpractices of the fraud, as those in authority hope that things will improve for the company with time. In this case, however, the things do not go as expected and, as a result, the consequences that will come much later are devastating not only to the company but also to the officers involved in the malpractices. The CEO Mr. Ebbers feels that the organization’s lifeline needs to be prolonged so that the investors do not lose their money at present, but it eventually happens when the problems get deteriorated (Sherman, September 26). This means that despite Sullivan’s attempts to improve long-term consequences, the situation could not be bettered and, that is why it was a final devastating effect on the company.

Recommendations

Attachment and approval mean that an individual is not certain about what is expected of them. To solve this issue, I would recommend the restructuring of the core values of the organization (Sherman, September 19). It is important that every organization has the basic values that direct and give purpose to its activities.

In this case, WorldCom lacked the value that would have enabled it to stay focused and not deviate from an established course into conducting the malpractices. When such values do exist, the organization tends to possess better critical thinking skills as a team; but without them, it is the responsibility of an individual to make some suggestions and try to impose them on everyone. It is evident that Ebbers and Sullivan are the ones who decide what is good for the company and this was done in a rather covert manner. With the introduction of a core value, multiple numbers of the merged companies will share a single goal, and this will mean that every employee will focus on the work towards the realization of that goal. This should succeed, because no one will seek approval for not being sure of what is supposed to be done and, as a result, they will reach solutions that will be inclusive and productive for the organization.

Regarding the deference to authority, I would recommend that the management adopts the hybrid management system that involves both the upside and the downside. This will help to improve transparency, since every employee will have a say in the organization. I will ensure that I introduce policies that popularize ethics among the employees and that whenever they are faced with an issue of fraud, they will always demand clarification from another senior officer (Ashkenas, 2011). In the same way, I will encourage directors to be involved with the management issues, so that they can be aware of the decisions made at the managerial level. This will help in curbing the unethical practices that may lead to the collapse of the company. WorldCom, for example, lacked the major supervising role of its directors. The leaders did not know what was happening in the organization and this became worse as the management continued to commit fraud in running the team, being certain that the directors would not know the real situation. By integrating the upside and the downside management system, the flow of communication will be enhanced, and the junior officers will have an opportunity to complain in case of some actions which they may find inappropriate (Sherman, October 10). Similarly, the directors’ involvement will help to provide a supervising role that will ensure that the CEO does not impose unethical practices on the company’s employees.

Preventing unpleasant long-term consequences was wrongly applied at WorldCom. In this case, I will recommend that the organization work to accomplish the long-term goals and set the code of conduct to be followed. In such a way, the team will aim at achieving its targets without trying to invent unethical methods that give the organization short-term stability. The management made a mistake when it decided to use the accrual releases and the expense capitalization to boost the wellbeing of the body, perfectly realizing that the industry, in general, was not performing well. It was unethical to hide the truth from the stakeholders, as this made them believe that everything was running smoothly and yet it was a ticking bomb that would explode at a later date. It is the main responsibility of every organization to uphold integrity and transparency towards both the stakeholders and the public. By encouraging ethics in the organization (Brookins, 2016), only the reasonable actions will be taken, and even if the outcome is not immediate, the team will not face a risk of collapsing.

Conclusion

In summary, WorldCom was run in an unprofessional manner in which all sorts of fraud were practiced. The CEO was inventive in the falsification of information, and as it could not achieve the desired result, the organization found itself in the perennial falsification until one of the employees in the audit department sought to reveal the crime. The structure and culture of the organization were the determining factors of the malpractice. The leadership was disadvantageous in this case, yet no one was to question the ethical consequences of the given instruction. The officers involved in the fraud were also provided with substantial incomes, so that they can cooperate in obeying the orders given to them, despite their immoral nature. The recommendation to the organization would be to structure it in a manner that the junior officers have a right to voice their concerns and can doubt the wrong issues. The board of directors should also be involved in overseeing the activities performed so that they can maintain the CEO in order. It is crucial to teach the employees decent morals so that the stakeholders get correct information that will help them in a sound decision-making process.