Cynthia Cooper and the WorldCom Accounting Fraud

WorldCom in 2001: A Company Under Pressure

In 2001, WorldCom was a company at the top of its game. Although 2001 was a difficult year for the firm, it was difficult for all telephone companies. The number of local phone companies had dropped from 330 to 150 in 2000. WorldCom lost market share and encountered significant competition in its internet services. However, it still had more than $30 billion in annual revenues and, even after extensive layoffs, retained over 60,000 employees (Warder, 2004), including Cynthia Cooper, Vice President of Internal Audit. The company had over 20 million residential accounts and business accounts well into the five figures (Warder, 2004). It provided internet services to over 100 countries (Warder, 2004).

In spite of industry turmoil, WorldCom was optimistic about its long-term prospects, and CEO Bernie Ebbers continued to make acquisitions for the company, leveraging them with company stock. These efforts placed strains on customer support, which appeared to be a major reason for the company's earlier success (Warder, 2004). Gradually, expenses ate further and further into revenues — a reality that should have been reflected in quarterly reports and would have resulted in a drop in stock value. Complicating matters, WorldCom had positioned itself in the stock market as a high-growth company, placing further pressure on its leaders to prevent any decline in stock prices or returns (Warder, 2004). The Internal Audit department was expected to help demonstrate these goals in the company's financial records (Warder, 2004).

Corporate Culture and the Road to Fraud

The company's leadership style was autocratic, and employee loyalty was a trait rewarded even beyond established company policy for both salaries and bonuses (Warder, 2004). Perks for loyalty were extended to the board as well as to key employees (Warder, 2004). WorldCom used Enterprise Resource Planning (ERP) to streamline costs and maintain profits (Warder, 2004). This placed a significant strain on WorldCom's auditing department, and market pressures made achieving such goals increasingly difficult. Gradually, Cooper's department was pressured to employ more and more questionable accounting practices in order to maintain WorldCom's image in financial reports and to demonstrate double-digit growth that did not actually exist (Warder, 2004). The scheme persisted for a time, at least in part because an outside auditing firm, Arthur Andersen, went along with it (Warder, 2004).

In an interview, Cooper commented, "The tone set at the top of an organization can permeate the corporate culture, and it's the actions of the company's executives that establish that climate" (Barrier, 2003). She noted that an inherent conflict of interest exists between an internal auditing department and the company in which it operates, and that it is up to top executives to establish an atmosphere where honesty is encouraged and unethical behavior is viewed as unacceptable.

Ironically, Cooper's original intent was to demonstrate that her department could help control the company's bottom line — not to become a whistleblower (Lacayo & Ripley, 2002). When she called a meeting to explain this to the executives, Ebbers was initially resistant; he arrived half an hour late, smoking a cigar, and demanding to know "what the hell" the purpose of the meeting was. Cooper had a well-organized agenda prepared. Her first slide demonstrated that she understood the need for the company to maintain its profits, and she then showed how her department could contribute to that effort — ultimately winning him over (Lacayo & Ripley, 2002).

Cynthia Cooper Uncovers the Fraud

Cooper became aware that someone was cooking the books almost by accident. In March 2002, a manager in another division noticed that funds in his division had been moved to boost the company's reported income. Cooper brought this to the accounting firm Arthur Andersen and was told to ignore it. When she refused to back down, the Arthur Andersen representative became angry and suggested that she might be putting her job at risk. She believed him and began removing personal belongings from her office (Lacayo & Ripley, 2002).

However, she was not fired. She instructed her staff to look deeper into WorldCom's books (Lacayo & Ripley, 2002) and discovered that the company's bottom line had been artificially inflated by classifying operating costs as capital expenditures. This had resulted in the company overstating its profits by over $11 billion (Barrier, 2003). As capital expenditures, the costs could be spread out over several years, diminishing their effect on the quarterly and yearly bottom line. In reality, the expenditures were ordinary expenses of doing business — fees paid to other telephone companies for using their phone lines — and should have been fully expensed in the year in which they were incurred (Lacayo & Ripley, 2002). Other auditors within the company backed up Cooper's assessment and agreed that the misclassification had to be corrected (Warder, 2004).

As Cooper and her team worked, they realized that Arthur Andersen had also played an important role in the Enron scandal. Given that history, and the firm's reaction when she had first approached them, she and her team quietly began conducting an audit of WorldCom's books — secretly, after hours. Concerned that they might be discovered and their data destroyed, they brought in a CD burner to back up their findings (Lacayo & Ripley, 2002).