WorldCom's accounting scandal and the ethics of whistle-blowing

WorldCom: The Ethics of Whistle-Blowing

In recent years, it has not been easy for employees to completely trust the corporations for which they work. Accounting scandals have made the average employee question business practices unlike before. The large corporate American framework built in culture; vision, core values, accountability and self-worth seem to have gone out the window with a certain degree of worry. Is it risky to work for a big business corporation? Has greed, ambition, the threat of globalization, lack of competition, poor leadership and the new technologies to make all this seem seamless, changed the rules for corporations and governance? What has happened to the days of trust and inspirational role models of the self-made every man? Has the bottom-line or the need for the last dollar put a shroud upon the business operation standards in this country?

There are no guarantees in life or big business. Michael Pfarrer writes, " Indeed, tales of the powerful and charismatic abusing their position for organizational and personal gain are as old as recorded history" (par. 2) but he elaborates the way in which society studies such corruption has changed. Such things are no longer kept secret but are broadcast for the whole world to hear. This type of communication warrants new implementations of laws and standards by which business operate. No longer can one not be accountable. It society has given it no choice but to allow Big Brother to watch. This paper will discuss the corporation of WorldCom, better known today as MCI. This paper will discuss in detail the accounting scandal that brought the company to its knees and the very public drama that followed. In this case, there was no one specific whistle-blower but a team of auditors that uncovered WorldCom's cooking of books. This act of whistle-blowing seems more prominent in today's society as information travels the speed of light. This paper will define the term whistle-blower as per Mish of the Merriam-Webster's Collegiate Dictionary, "one who reveals something covert or who informs against another and fears reprisal (1427). In this case, it was the internal rumors and then audit of the WorldCom's books that brought the truth to the forefront. Not even the CEO Bernie Ebbers could dispel the rumors growing and publicly came out as a lie and said "WorldCom has a solid base of bill-paying customers, strong fundamentals, a solid balance sheet, manageable leverage, and nearly $10 billion in available liquidity" (Mehta, par. 3). Then what cause the company to crumble?

It is ironic; WorldCom's product would lead to the company's downfall. Still one is left to wonder, what happened? Why weren't there procedure in place to act as damage control agents? Was this drama a cry for help and will WorldCom aka MCI be able to survive the aftermath of its actions? How has this scandal affected the its employees but the common man? What are the long-term effects of such a blunder? What measures can be put into place to stop it from happening again? The paragraphs below will pursue answers to these questions and explore personal perceptions. I believe the truth would have been revealed with time.

Company Profile and Mission Statement

By the time of the scandal, WorldCom had acquired MCI as part of an historical moment in business history, making the company of the nation's largest telecommunications companies. Today, WorldCom fights for survival. As of Spring 2004, it was set to emerge from bankruptcy chapter 11. As of this morning, WorldCom did not have a web site to peruse for information but is doing business as MCI.com. I was able to gather information on MCI, which also struggles with the ramifications of WorldCom's actions. However, sometimes out of the ashes, a phoenix rises, stronger and wiser than before.

Below is company information for MCI's web site. It still remains the United States' number two telecommunications carrier. It is a belief that the only reason MCI was able to continue forward, had nothing to do with its being under the WorldCom umbrella but everything to do with its own corporate brand identity prior to the scandal.

Today, MCI's focus is clear to use our global network and expertise to deliver innovative products that provide simplicity and unsurpassed value to our customers. With millions of business and residential customers, MCI® is a leader in serving global businesses, government offices, and U.S. residential customers.

MCI delivers a comprehensive portfolio of local-to-global business data, Internet and voice services to a 'Who's Who' list of the Fortune 1000. MCI is an established leader in IP network technology and Virtual Private Networking (VPN), delivering VPNs based on private data networks as well as our global Internet backbone, which spans six continents. The portfolio includes SONET private line, frame relay, ATM and a full range of dedicated, dial and value-added Internet services.

MCI today owns and operates some of the world's most complex and sophisticated custom networks, delivering value for a wide variety of customers and more than 75 U.S. federal government agencies. They also are a premier provider of audio, video, and net conferencing services that enable customers to meet and collaborate remotely to effectively conduct business anywhere, anytime.

MCI is the United States' second largest long distance company for residential customers. In April 2002, MCI launched The Neighborhood built by MCI, the industry's first truly any-distance, all-inclusive offering combining local and nationwide long distance calling from home to consumers for one low monthly price. The Neighborhood continues MCI's pioneering tradition, which has been based on opening up monopoly markets and providing innovative services to consumers nationwide.

Product

In the telecom industry, customer communications travel over networks that may or may not actually be owned by the company. Generally, WorldCom employed an "on-net" operating strategy to provide voice calls and data transmissions through its own proprietary communications networks and related facilities. In order to pursue this "on-net" strategy, WorldCom maintained extensive network facilities to connect metropolitan centers and various regions throughout the world. To serve customers that were not directly connected to its owned network, WorldCom paid fees to use or lease "off-net" facilities and connections from other telecommunication companies. The fees paid to use or lease facilities belonging to third parties are referred to as "line costs" or "telco" expenses. Thus, line costs are the costs of carrying a voice or data transmission through any portion of its path from its origin to its destination.

Since WorldCom's own network could not directly connect all potential phones and electronic devices in the world, WorldCom paid outside service providers to carry some portion of its calls. For example, a call from a WorldCom customer in Chicago to London might start on a local Chicago phone company's line, flow to WorldCom's own network, and then get passed to a British phone company to be completed. WorldCom would have to pay both the local Chicago phone company and the British provider for the use of their services. All of these costs are line costs.

Managing line costs was tremendously important to WorldCom's profitability since they represented approximately half of the Company's total expenses. As a result, WorldCom's management and outside analysts paid significant attention to line cost ratios and trends. WorldCom regularly discussed its line costs in its public disclosures. WorldCom's key measure of line cost management, both internally and externally, was the ratio of line cost expense to revenue, called the "line cost E/R ratio." An increase in the line cost E/R ratio indicates deteriorating performance: either under-usage of leased capacity or overpayment for leased capacity. The Company's reported quarterly line cost E/R ratio hovered within an incredibly narrow range around 42% from late 1999 through early 2002, even though the period was an extremely volatile time for the telecom industry.

Resolution

Ultimately, it is the role of leadership that failed WorldCom. The fact that there was no real accountability in place or the procedures for internal knowledge of such practices, lead to the downfall. As part of a resolution, it is safe to assume a good plan of action would be to have multiple levels of the organization involved in a checks and balances type protocol when not just management has a look. In the case of WorldCom, leadership fell on the shouldered of two men who strategize the practices. It was the employees' belief in these two men that also contributed to the failure of this company. Pfarrer explains how easy it can be to fall into corrupt patterns as "charismatic leaders' ability to excite followers to follow their mission, and their impression management skills in interacting with stakeholders, could also lead to increased opportunity" (par. 19). This is same type of darkness that led the Nazi Party during the Holocaust. Loyalty was apparently well compensated, with select employees compensated beyond the guidelines of the company's approved salary and bonus schedules allowable for their positions. Ebbers and Sullivan frequently made the decision to grant excessive compensation, perhaps to ensure future employee loyalty. When top management requested compensation outside-of-policy guidelines, approval by the Human Resources Department was virtually assured. When asked later why HR let this happen, key members admitted they did not want to say no to Ebbers.

For a future at MCI, strong leadership based on values will remain key. This type of leadership involved a certain level of emotional intelligence where feelings of powerful do not become overwhelming. Of course if leadership and responsibility are equally shared, then power will be as well. The key to effective leadership does not come from charisma but from integrity and sharing information. Hughes writes an effective leader will have impact upon their team and this is "apparent in the growing interest over the past decade in topics like the leader's genuineness, authenticity, credibility and trustworthiness" (3). A leader's reflection of these attributes is found in their level of connectedness with employees. As a result leaders are more interested in mentoring and training their team rather than focusing on output of numbers or turn around time. These qualities are a good indicator for selecting a potential manager. This development in team building allows for "providing people opportunities to learn from their work rather than taking them away from their work to learn" (Hughes 4).

Long-Term Effects

Davidson explains the consequences of such actions "WorldCom's accounting fraud, drove it into bankruptcy protection with Sullivan pleading guilty and agreeing to testify against Ebbers" (par. 9). Last year the company clawed its way out of bankruptcy in just 21 months despite an $11 billion dollar scandal and its key management figures being indicted on fraud charges. WorldCom was able, due to its acquisition of MCI, to slash its debt from $41 billion to $5.8 billion (Davidson, par. 5). Still this does not change the fact that while the debt was being reorganized so was the company workforce. Davidson writes, "a recent layoff shed 4,000 telemarketing workers and WorldCom has suggested more of its 50,000 employees also be cut" (par. 25). The company's competitive edge also been compromised due to the scandal. As a result of the bankruptcy, MCI has missed out on numerous opportunities to invest in new technologies such wireless infrastructures for Internet users. This will cost them terribly in the future.

This, however, does not compare with the price the public has paid for such corporate crime. Johnston expresses, "the cost of the scandal was likely to be in the billions. There are direct financial costs such as lost salaries, company stock portfolios and investment in governmental inquiry" (p. 1). These direct costs do not include federal court fee still being incurred by class action lawsuits or the costs of new regulations to be paid with tax dollars. Still is the indirect effect on the public personal assets that is most damaging. Should WorldCom be accountable for these losses? Johnston writes, "one in two U.S. households are now invested in the stock market" (p.1). This does not include the segment of the public that used WorldCom stock to diversify their 401K portfolios. It is as a result of such a scandal that the public is more aware such white-collar crime and "this may mean more laws protecting whistle-blowers from harassment and retaliation at work" (Johnston, p.2).

Recommendations

As mentioned earlier, the role of effective leadership is vital to the resurrection of WorldCom. Not only is leadership so vital but also a plan of action must be set into place. A system of checks and balances to implement regulations is needed across the board. This starts policy change. MCI'S new management has implemented a zero tolerance policy for ethics and they have set into action at the ground level. This meant hiring a new employee to act as ethics officer but it also meant putting into practice training and reinforcing the message on a consistent basis. This new governance procedure "gives more power to the shareholders and limits executive pay" (Davidson, par. 27). What this really does is sets boundaries for upper management while looking to the employee population for action. Another practice that should be effective is as Grossi discusses "the auditor needs to play an strong, proactive role in the organization" (par. 4) and be in the forefront of everyday practices. This creates an environment of ethical behavior and promotes trust within the ranks. It also creates new barriers to aid in stopping executive misbehaviors and provides data of accountability.

Conclusion

The full scandal includes accounting and auditing issues, corporate governance issues, finance issues, management issues -- all intensified by economic problems. The actual fraud spanned four years: 1999-2002, not just the few incidences that are the focus of this case. The range of fraudulent activities extended beyond lines cost under accrual, the improper capitalization of line cost expenses, over-recognition of revenue, and disclosure omissions. Income tax accruals, among others, were also manipulated. WorldCom's Board of Directors was far too passive. Management was not forthcoming with the independent auditors. Grossi writes, "blowing the whistle is an act of desperation, not desirable business strategy" (par. 2). Even though it took time to uncover, the auditors did risk a fair amount in publicly speaking out about WorldCom. Still I am of the belief such practices would have come to the surface eventually as the leadership started to crumble. There is not way a company can continue to function based on lies because eventually the truth will be revealed.