Case Review of WorldCom

Situation

The rapid expansion in the 1990’s made WorldCom concentrate on building revenues and getting adequate capacity to deal with the expected growth. Their goal was to increase the company’s market value, not capturing the market share. The managers were forced to do all possible in order to bring revenue, even if that meant the short-term gains of a project were outweighed by its long-term costs. Consequently, for WorldCom to meet the expected customer demand increase, it entered into long-term fixed rate for network capacity. These leases had punitive termination provisions, thus WorldCom could only pay heavy termination fees to avoid lease payments.

In 2000, the industry conditions began to get worse because of the increased competition, overcapacity and reduction of demand for telecommunication services. World Com had a lot of pressure on the line-cost expenditures to revenue (E/R ratio) that was keenly monitored by industry observers and analysts.

The declining of business operations made Sullivan, the WorldCom CFO, to use accounting entries to realize targeted performance. These entries included accrual releases and capitalization of line costs. Sullivan instructed his employees to release accruals that he alleged were too high to future cash payments. Several business divisions had accruals for future cash payments that were below the actual amounts they would have to pay when the bills came in the following period. The company’s E/R was recorded as 42%, instead of 50%, as it would have been if accrual release and reclassification had not been done.

Normative Analysis

Vinson, one of the senior managers in General Accounting, and Normand were instructed to release $828 million of line accruals into the income statement. They were against it, claiming that it was not good accounting but were promised that it would not happen again. Sullivan gave them assurance that they were not doing anything illegal and that he would take full responsibility for their actions. More instructions to transfer more money of line of costs into capital expenditure were given to Vinson, who thought that she was less defensive but would again not quit without having another job.

Arthur Andersen, the independent auditors of WorldCom, released an audit that did not tally with Cooper’s, the internal auditor report. Andersen failed to act professionally by accepting the absence of variance, thus concluding that there was no need for follow up instead of investigating how that was possible. It also acted unprofessionally by releasing a report, indicating WorldCom was a moderate risk client, while its initial findings were that it was a high risk client. WorldCom staff violated their fiduciary duties by giving the wrong information to Andersen, withholding and altering information and omitting details. This is because Andersen was in charge of reporting to the public the financial position of WorldCom and this misleading information made Andersen give misleading information to the public. This, eventually, affected millions of employees who lost their jobs and the many shareholders who were left with worthless shares, when the company was declared bankrupt.

Causal Analysis

The situational bankruptcy by WorldCom was a result of variety of the ethical, professional, moral and social wrongdoings, propelled by the company’s select leaders - Ebbers, and Sullivan. Ebbers openly demonstrated particular lack of respect for the company’s senior legal team. Despite the company’s senior lawyers’ advice, Ebbers made sure to disregard any advice that he did not like. The lack of proper ethical and professional connection between Ebbers and the senior lawyers of WorldCom placed the company in a delicate position, since it would be impracticable for the company to implement the legal advice provided by the senior lawyers. Lawyers are crucial to the establishment, development and maintenance of a company because virtually every transaction by a company revolves around a legal concept. Ebber’s creation of a culture that disregarded the roles of the legal department has put the company on edge.

Another reason for the company’s failure was that it lacked a comprehensive organizational system. Every department had developed their own rules and styles of management. Further, when there were any internal efforts to establish a corporate code of conduct, Ebbers would bluntly dismiss these efforts. He would term them as a waste of time. This interfered with the moral and social aspects of the employees’ workplace.

The structural approach communicated from the top down was that employees should follow their superior’s instructions without question. Seniors would unfairly criticize juniors in case more senior managers were challenged. This created a morally and socially unstable environment, as one did not have an option but do as ordered.

guarantee

There were various violated moral standings, such as the unreasonable compensations by Ebbers and Sullivan, especially to members of the financial department. These were offered contrary to the company’s policies. The HR department never raised an object to these, probably out of fear of the two leaders.

The employees lacked an independent channel for conveying concerns about the corporation’s policies or actions. This demoralized the employees and promoted further impunity by Ebbers and Sullivan, thus resulting in the company’s loss.

Ethical Systems Design

In order to prevent the occurrence of such a situation faced by WorldCom, one would need to ensure that there is an establishment of clear rules, setting out the structure of the company. This should also provide a distinction of the roles played by every department or member of the organization. This provides employees with the space to perform their duties as required, without any arbitrary interference. This, therefore, promotes the company’s production. In WorldCom’s case, one would have to ensure establishment of clear rules regarding the powers of the CEOs and CFO’s. The lawyers would then have an opportunity to serve the company as required.

There should also be an established simple channel through which employees can relay their opinions and complaints. Through this channel, the company is able to understand other activities happening in the company and what the employees think of them. It also motivates the employees to perform better, as they get to explore both their ethical and social aspects in performing the work. In WorldCom’s case, the employees at the financial department would not have altered or destroyed the documents, since the company would have stopped them. 

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