WorldCom Downfall – Failure to Live up to its Mission Statement
WorldCom was a global telecommunication company that, at some point, grew to become the second-largest phone company offering long-distance services. Its mission statement read that “Our objective is to be the most profitable, single-source provider of communications services to customers around the world”. Moreover, the company’s supplier diversity mission statement was defined as to “Create a competitive advantage for WorldCom and contribute significantly to WorldCom’s business success by promoting business practices that provide greater opportunity for a diverse supplier base”. The company, after witnessing a period of growth propelled by various successful acquisitions and mergers, became bankrupt with a damaged image due to its accounting malpractices. It filed for bankruptcy protection on July 21, 2002 before transforming its name to MCI and relocating its corporate headquarters to Dulles, Virginia, from its previous location in Jacksonville, Mississippi. The accounting malpractices experienced at WorldCom are a hallmark in accounting history.
The accounting scandal is a revelation of WorldCom’s failure to honor its mission statements. The companies aim was to be the most profitable, a goal which it strives to achieve through various acquisitions and mergers until its growth strategy hit a snag. At the time, there was a boom in the telecommunication industry and its strategies were justified. Nonetheless, the deceiving practices that the senior executives and other employees engaged in are inconsistent with its mission. The company adjusted its financial records to reflect the profitability that some administrators expected rather than the company’s actual profits. Therefore, instead of working on appropriate strategies that would allow it to realize profits legitimately, it emphasized a malpractice that ruined its business. Specifically, the accounting department classified operating expenses as capital expenditures to increase profits. This means that in contrast to its objective of being the single-source communications services provider, the company would have to forego some of its capital investment to compensate for the deficit. It is worth noting that its competitors would have much likely taken advantage of the reluctance by WorldCom to service its customers. It is substantial to say that the direction that WorldCom took indicates that its priorities were on the shareholders. Even with the emphasis being on the shareholders, the actions proved to be risky and not adding any value to the company, let alone the shareholders. In fact, the ultimate result of these accounting malpractices was the company’s bankruptcy and the consequential loss of employment by the staff as well as of investment by the shareholders.
Looking at the supplier diversity mission statement, the actions perpetrated by the accounting fraudster at WorldCom fell short of this statement. Specifically, the company failed to promote proper business practices that would make it possible to offer a “greater opportunity for a diverse supplier base”. Such business practices involve actions that are within ethical guidelines. The use of ethical principles is vital in an organization and could mark the line between its success and failure. Also, ethics is important in the success of businesses. Therefore, the accounting malpractice by WorldCom violated the ethical code that promoted realization of opportunities for suppliers and therefore promotion of business growth. The mission statements were perfectly fine; nonetheless, they emphasized on growth of the company and increasing shareholder value such that it became easier to bend the accounting norms to match the expectations at the stock market.
Ethical Tenets Violation by Key WorldCom Administrators
The key administrators at WorldCom scandal compromised various ethical tenets/principles that guide human behavior. These tenets include Honesty, Integrity, Promise keeping, Fidelity, Caring for Others, Respect for Others, Responsible Citizenship, Responsible Citizenship, Pursuit of Excellence, Accountability. The administrators involved in the scandal include Bernard Ebbers, former Chief Executive Officer; Scott Sullivan, former Chief Financial Officer; David Myers, former Controller; Buford Yates, former Accounting Director; and Betty Vinson and Troy Normand who were the Accounting managers.
All the above administrators were not honest. The actions of collaboration to make illegitimate adjustments to the firm’s financial accounts were deceitful to the board of directors, the shareholders, investors, and the public a large. The principle of honesty requires that one be truthful and sincere, and refrain from cheating, stealing, lying or deceiving. However, all these administrators – in particular the chief executive officer, the chief financial officer, controller, accounting director, and the accounting managers – came together with the intention to deceive the world. Their acts were dishonest even to their fellow employees, the shareholders, and the company’s partners who deserved to know what was happening.
Scott failed to keep his promise. It is ethical to keep promise or respect an agreement that ones enter into even if there is no legal commitment. Scott Sullivan promised his juniors – Betty Vinson and Troy Normand – that the misclassification of the operating costs would happen only once. He did not honor this promise and had to ask his two staff to collaborate several other times when situations became worse. Even so, the first time collaboration by these two staff was not ethically justifiable.
Betty and Troy compromised their integrity as did all other administrators. Integrity requires that one remain principled with honor and courage so as to act on convictions. In contrast, Betty, Troy, David and Buford bent their principles to wrongfully adjust the financial statements. Furthermore, each one of them knew that it was wrong to make these misclassifications in the financial records but they went ahead and collaborated in doing that. In other words, they were “two-faced”. On the other hand, Scott adopted unscrupulous methods to make sure that the financial statement reflected the expectation of shareholders. The Chief Executive Officer, on his part, allowed this to happen under his watch as long as the company maintained a profitable image.
Bernard Ebber was not accountable as a Chief Executive Officer. Although he allowed the fraud to happen, he refused to take responsibility and even pleaded not guilty for the charges filed against him in the law court. He ought to have realized the cost of making the adjustments to the company’s accounts, and as the person entrusted with the running of the company take appropriate actions. He failed to account for the fraud despite being the person responsible for safeguarding the company against such practices.
The aforementioned administrators further showed that they did not care and respect nor did they exhibit a character of responsible citizenship and pursuit of excellence. They overlooked the consequences of their actions to safeguard their positions. For instance, the need for a source of income by Betty and Troy blinded their realization that shareholders and other employees would be hurt in the long run. All that Scott and Bernard cared about was that the company maintained a particular image while David worked to ensure his boss was contented. The actions by these administrators further show their lack of respect for others especially to those that concealed these happenings but who ought to know. On his part, Ebber’s resolve to borrow from WorldCom to finance his personal investment was a show of lack of care and respect for others. In fact, his lack of respect is demonstrated where he failed to appreciate the role of lawyers in corporate governance. He burdened the company with loans not caring much that his decision could affect shareholders. Furthermore, these actions were in contrast to the values of responsible citizenship and the pursuit of excellence.
The actions of the Vice President for Internal Audit, Cynthia Cooper to release the confidential information they unearthed through privately conducting investigations may indicate her infidelity to the company. There were grave consequences to the company due to her action that even affected the employees. Companies should encourage internal whistle-blowing so that problems are solved within the organization before employees feel they must go outside to get action. However, the concept of fidelity should be much so to safeguard the greater good. Cooper’s actions stopped the accounting malpractice from continuing, a trend that would have gravely affected the company’s stakeholders that includes investors and shareholders as well as the country.
The Administrators Behavior was Inconsistent with What was Happening
The day-to-day behavior patterns that the WorldCom’s administrators exhibited during their malpractice were not consistent with what was going on. First, the administrators who included the accounts manager, the chief financial officer, the controller, and the accounting director worked effortlessly to ensure that the financial accounts indicated an increase in profits and a decrease in expenses. However, in actual sense, the company’s expenditure continued to rise while profits continued to decline as the internet boom fizzled out.
Secondly, the administrator’s behavior did not match up to what was required through the process of acquisitions and mergers. The senior officers, for instance, did not pay much attention to the operations of the company to ensure proper integration of the acquired firms even though such processes require that management pay great attention. Moreover, these administrators ignored the list of customers who owed them money as credit and were least likely to pay up. In addition, the senior administrator authorized mergers and acquisitions adding more burden to the already existing credit burden. Note that the telecommunication boom, which was the basis for the company’s expectation to make profits was fizzling out.
Thirdly, the senior executives acquired loans from the company despite its huge credit burden and the diminishing profits to finance their personal endeavors. The chief executive officer, for instance, borrowed against his stock. Such a decision overlooked the possibility that the stock might go down and result in negative consequences for both him and the company. It is worth noting that the amount of loan granted to Ebber was one of the largest ever witnessed in public traded companies. Moreover, other executives including Scott Sullivan and David Myers accessed loans from the company that they used for personal reasons.
WorldCom Culture and Its Negative Impact
WorldCom did not recognize the significance of creating a culture that was concerned about people and their stake in the organization, and as members of the organization. Its culture was characterized with emphasis on numbers, concealing information even to those who required to know, trusting senior executives blindly, and discouraged opposition.
The force of this culture emanated from the top executives. The chief executive officer, for instance, put pressure on his employees that contributed to their misconduct. He promised particular results to investors and demanded to his staff that that result be delivered. Moreover, he disdained the individuals as well as procedures that ought to have been the aversion to misreporting. In particular, he brushed away the idea of creating a corporate code of conduct. He also disrespected the role of lawyers in corporate governance. In all his demand that staff delivers certain results, he did not ask them to operate within ethical principles.
The senior administrators and management also employed various mechanisms that allowed only selected few people to access the financial information and hence the irregularities in accounts. Crucial information was only shared within a circle of trusted senior officers. Senior management prevented employees from discussing certain information that was not adding up.
The methodical attitude expressed from senior executives that staff should not question the bosses and the geographic remoteness of several business units also added to the factors of a culture that allowed the fraud to occur. Personnel was not allowed to challenge their seniors in the ladder of authority and when issues of concern came, no one rose to question but to rely on the trust they accorded their seniors. The remoteness of the business units is explained, for instance, having the company headquarter in Mississippi while the accounting department operated in Texas, other departments in Washington, D.C. and so on.
This case should be a lesson to other organizations in various aspects. Organizations ought to promote an appropriate culture that allows such misconduct to be checked and stopped. More, organizations should emphasize on conduction of business with ethical principles starting from the top, and that there are grave consequences associated with unethical practices.