WorldCom's Collapse and Its Impact on Accounting Reform

The Corporate Climate Before WorldCom's Fall

The decade preceding the turn of the millennium was a period of great economic expansion for North America and the global community. Advances in communication and web technologies, changes in the nature of the global economy, and a period of generally robust corporate growth suggested limitless opportunities for Americans at every level of the economy. However, this period was also characterized by widespread deregulation of corporate behavior and a growing culture of entitlement. This created an environment of corporate lawlessness in which companies and CEOs committed many dishonest acts regarding the presentation of financial outlooks, accounting realities, and performance reports — affecting major startups and long-standing, reputable firms alike.

The turn of the millennium brought new pressures, including the aftermath of September 11 and a wave of devastating revelations about the conduct of America's leading corporations. Over the following decade, Enron, Adelphia, Tyco, Nortel, WorldCom, Lehman Brothers, Merrill Lynch, Bear Stearns, AIG, and Bernie L. Madoff Investment Securities LLC — to name only the most prominent examples — either collapsed following revelations of massive corruption or declared bankruptcy due to gross mismanagement. Among these, WorldCom stands as a particularly instructive example of the accounting scandals that dismantled American economic growth over just a few years.

WorldCom's Culture of Lawlessness

At the time of its collapse, WorldCom represented the single largest corporate bankruptcy declaration in American history. The events leading to that collapse appear to have been foretold by a deeply dysfunctional corporate culture. Highly decentralized and lacking any meaningful internal control mechanisms, WorldCom's culture largely reflected that of American corporate culture at large. An atmosphere of deregulation and poor administrative oversight had produced a profound absence of accountability — particularly in legal matters.

Kaplan and Kiron (2007) document how CEO Bernard Ebbers was especially resistant to meaningful legal oversight. As they note, "Ebbers did not include the company's lawyers in his inner circle and appears to have dealt with them only when he felt it necessary. He let them know his displeasure with them personally when they gave advice — however justified — that he did not like. In sum, Ebbers created a culture in which the legal function was less influential and less welcome than in any healthy corporate environment." (Kaplan & Kiron, p. 3)

According to Kaplan and Kiron, the ambition to be the top-earning company on the stock market drove an aggressive growth orientation premised on ever-increasing revenues. When the broader market downturn struck — affecting the entire global community — Ebbers and his associates began projecting earnings according to this ambition rather than reality. In truth, a company that aspired to be "the No. 1 stock on Wall Street" was steadily losing money while publicly claiming growth in the billions.

Accounting Pressure and Securities Oversight

The pressure placed on accountants at WorldCom was reflective of pressures facing accountants throughout the economy during this period of weakened securities oversight. The relationship between regulation and accounting integrity is essential, and the erosion of that link carried catastrophic implications for the profession as a whole. Scott (2006) explains that "efficient securities market theory has major implications for financial accounting. One of these is that supplementary information in financial statement notes or elsewhere is just as useful as information in the financial statements proper. Another is that efficiency is defined relative to a stock of publicly known information. Financial reporting has a role to play in improving the amount, timing, and accuracy of this stock, thereby enabling capital markets to work better and improve the operation of the economy." (Scott, p. 115)