Conflict in Ethical Decision Making at Worldcom
Conflict in Ethical Decision Making at WorldCom Kerry Seeley Business Ethics MT4200 National American University September 25, 2007 Craig Chaplin Abstract This paper explains how WorldCom began and where it’s at now. It didn’t take long for WorldCom to become the second largest long distance phone company. WorldCom provided a legal framework for people working in communication projects on an individual basis, mainly in Central America, but they also developed projects together with partners in Latin-America, Africa and Europe, occasionally in cooperation’s with major Dutch funding organizations.
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As shares hit record highs WorldCom became known as a valuable company. In the year 2002 WorldCom hit bottom when scandalous acts were discovered. Upon doing research on a business ethical problem, I found that many companies have been involved in one. I found that WorldCom had conflict in ethical decision making. Following will be the history of WorldCom through current position, the role of auditing, and what could have been done differently to prevent or address the current issue at hand.
In 1983, two businessmen, Murray Waldron and William Rector laid out a plan to start a discount long-distance provider called Long-Distance Discount Service (LDDS). The company began in Jackson, Mississippi. In 1985, LDDS selected Bernard Ebber, who was an early investor, to become chief executive officer. LDDS went public in August 1989 when it acquired Advantage Companies, Inc. LDDS name was changed to LDDS WorldCom in 1995, which later became known as just WorldCom. During the 1990s, LDDS growth under WorldCom was fueled mainly through acquisitions and reached its peak with the acquisition of MCI in 1998.
Among the companies acquired or merged with WorldCom, LDDS merged in an all-stock deal with discount long-distance service provider Advanced Telecommunications in 1992. In 1993, LDDS acquired long-distance providers Resurgens Communications Group and Metromedia Communications in a three-way stock and cash transaction that creates the fourth-largest long-distance network in the United States. LDDS acquired domestic and international communication network IDB Communications Group in an all stock deal in 1994.
In 1995, LDDS acquired voice and data transmission company Williams Telecommunications Group (WilTEl) for $2. 5 billion cash and changed its name to WorldCom. WorldCom merged with MFS Communications Company, which owned local network access facilities via digital fiber optic cable networks in and around major U. S. and European Cities, and UUNet Technologies, an internet access provider for businesses, which took place in 1996. In 1998, WorldCom completed three mergers: the largest in history at this time was with MCI Communications for $40 billion.
The other two WorldCom merged with at this time was with Brooks Fiber Properties for $1. 2 billion and CompuServe for $1. 3 billion. “On October 5, 1999 Sprint Corporation and MCI WorldCom announced a $129 billion merger agreement between the two companies. The deal would have been the largest corporate merger in history up to that time. The new company was to have been WorldCom and would have been the largest communication company in the United States. The merger would have put AT&T in the number two spot of the largest communication companies in the US for the first time in history.
However the deal did not go through because of the pressure from the US Department of Justice and the European Union (EU) on concerns of it creating a monopoly. On July 13, 2000, the Board of Directors of both companies acted to terminate the merger. Later, in 2000, MCI WorldCom renamed itself WorldCom without Sprint being a part of the company. ” (Editor. 2002) The acquisition of Digex (DIGX) in 2001 was complex. WorldCom acquired Digex’s corporate parent, Intermedia Communications. WorldCom then sold all of Intermedia’s non-Digex assets to Allegiance Telcom.
As early as June 2001, evidence showed that accounting fraud was discovered when several former employees gave statements alleging instances of hiding bad debt, understating costs, and back dating contracts. It was brought up to WorldCom’s board of directors, but they did not investigate these claims. Shareholder’s filed a lawsuit against WorldCom, but it was thrown out of court due to lack of evidence. On March 11, 2002, WorldCom received a request for information from the U. S. Securities and Exchange Commission (SEC) relating to accounting procedures and loans to fficers. SEC discovered that the prior claims were valid. The SEC filed federal lawsuits against several executives and a civil fraud lawsuit against WorldCom. “The SEC’s investigation into the accounting fraud at WorldCom turned up several key players. The following is a list of high-ranking WorldCom executives and other employees who were implicated in the accounting fraud: 1Bernard Ebbers – former CEO of WorldCom. Ebber is suspected in the accounting fraud but no charges have been filed against him. 2Scott Sullivan – former CFO of WorldCom.
Sullivan was indicted on charges of securities fraud, conspiracy, and false statements to the SEC. 3David Myers – former controller of WorldCom. Myers is charged with securities fraud, conspiracy, and false statements to the SEC. 4Buford Yates Jr. – former director of general accounting. Yates pled guilty to charges of securities fraud and conspiracy. 5Betty Vinson – former director of management reporting. Vinson pled guilty to charges of conspiracy to commit securities fraud. 6Troy Normand – director of legal entity accounting. Normand pled guilty to securities fraud and conspiracy charges.
WorldCom is currently settling the civil fraud lawsuit with the SEC. ” (Editor . No date provided) After the SEC requested information in March, WorldCom says they are cutting 3,700 jobs overall in the U. S workforce. WorldCom’s corporate credit ratings are cut by Standard & Poor’s, Moody’s Investors Service, and Fitch. They expect WorldCom’s revenue to deteriorate during 2002, with prediction for comeback in 2003 uncertain. On April 30, 2002, WorldCom CEO Bernard Ebbers resigns among slumping share prices and SEC looks into the company’s support of his personal loans.
At this time Vice Chairman John Sidgmore takes over WorldCom. Sidgmore blames Arthur Andersen for not finding the fraudulent activities going on in the company. Sidgmore says the company will file Chapter 11 bankruptcy protection but feels they will emerge with 9 to 12 months. WorldCom will also hire a restructuring expert. Shortly after Ebbers resignation, Sidgmore holds a news conference, apologizing for the scandal and says they are working on funding proposals with its lenders to stave off bankruptcy. The comptroller of New York State files suit for losses in its pension funds.
On June 27, 2002, the U. S. House Financial Services Committee subpoenas top current WorldCom executives, Ebbers, Sidgmore and Sullivan. Also, Salomon Smith Barney’s analyst Jack Grubman, former executive, was subpoenaed to testify on July 8. Former WorldCom CEO Ebbers tells the U. S. House Financial Services Committee that he did nothing wrong and refuses to answer any questions. Ex-CFO Sullivan also refuses to testify. Salomon Smith Barney’s analyst Jack Grubman admits he attended WorldCom board meetings but denies having inside information about the woes.
WorldCom gets a request from The House Energy and Commerce Committee for documents for its own investigation. How was fraud committed? Fraud was committed by financial executives at WorldCom exercised in many methods of hiding expenses for a period beginning in 1999 and continuing through May 2002. Under the direction of Scott Sullivan, David Myers, and Buford Yates the company used fraudulent accounting methods to hide its declining financial condition by drawing a false image of financial growth and profitability to hike up the price of WorldCom’s stocks. The fraud was done primarily in two ways.
One way was underreporting inter connection expenses with other telecommunication companies by capitalizing these costs on the balance sheet rather than correctly expensing them. Secondly, they inflated revenues with made up accounting entries from corporate unallocated revenue accounts. How did the fraud affect WorldCom? WorldCom shares plummeted in after-hours trading, falling as low as 20 cents. The stock was halted after shares fell to 9 cents in premarket trading. WorldCom shares once traded as high as $15 at the beginning of the year and were even as high as $64 in 1999.
Who was WorldCom’s auditor and what role did they play in this? WorldCom’s auditing firm was Arthur Andersen until they were convicted of obstruction of justice related to its work for Enron. “Andersen issued a statement last night saying its work “complied with SEC and professional standards at all times. ” It added: “The WorldCom CFO did not tell Andersen about the line – cost transfers nor did he consult with Andersen about the accounting treatment”. ” (Dan Ackman. June 26, 2002) Arthur Andersen was replaced by KPMG International.
WorldCom’s internal audit department uncovered approximately $3. 8 billion of the fraud in June 2002 during a regular examination of capital expenditures and let KPMG International know, which resulted in Sullivan being fired and Myers resigning. Also, Arthur Andersen withdrew its audit opinion for 2001 and the SEC launched an investigation into these matters on June 26, 2002. What was done by the SEC and the court to rectify the situation? The Securities and Exchange Commission filed a civil action on June 26, 2002 with the federal istrict court in New York charging major global communication provider WorldCom, Inc. with an enormous accounting fraud adding up to more than $3. 8 billion. The complaint alleged that WorldCom fraudulently overstated its income before income taxes and minority interests by approximately $3. 055 billion in 2001 and $797 million during the first quarter of 2002. On June 28, 2002, the court ordered WorldCom to preserve documents and assets, and will appoint a corporate monitor. “Based on a joint agreement between the Commission and defendant WorldCom Inc. , U. S. District Court Judge Jed S.
Rakoff today entered an order: 1Directing WorldCom and its affiliates to preserve all items relating to WorldCom’s financial reporting obligations, public disclosures required by the federal securities laws, or accounting matters. 2Providing for the court to appoint a Corporate Monitor having oversight responsibility with respect to all compensation paid by WorldCom. The Corporate Monitor will have responsibility to prevent unjust enrichment as a result of the conduct alleged in the commission’s complaint and to ensure that WorldCom’s assets are not dissipated by payments that are not necessary to the operation of WorldCom’s business. Forbidding, until the Corporate Monitor is in place, WorldCom from (1) paying more than $100,000 to any present or former officer, directors or employee, or any of its affiliates; or (2) making any extraordinary payment to any present or former WorldCom director, present or former officer who holds or formerly held a position at or above the level of vice-president, or any person currently or formerly employed within WorldCom’s financial reporting or accounting functions. 4Directing WorldCom to cooperate with the Corporate Monitor in full and make its books, record, and accounts available to the Corporate Monitor. Editor. June 28, 2002) What was the president’s view on the situation? On June 29, 2002, President George W Bush demands corporate abuse laws. “President Bush calls for touch new legislation to restore faith in American business. Mr. Bush said those guilty of corporate fraud should be sent to jail for the sake of US capitalism. He argued that people guilty of such abuses should be prevented from holding high-level business positions again. ” (Editor. July 1, 2002) What steps did WorldCom take?
The SEC receives from WorldCom sworn statements stating that their audit committee is reviewing its financial records for 1999-2001 regarding certain material reversals of reserve accounts. WorldCom also received notices from their lenders that they could demand immediate repayment for defaulted loans. NASDAQ resumes WorldCom’s shares, opening at about 8 cents. The Bush administration is also reviewing existing government contracts with WorldCom and could deny the company new business. These events took place on July 1. What steps did the SEC take? Other events took place in July of 2002.
Former SEC Chairman Richard Breeden is appointed by the U. S. District Judge Jed Rakoff to prevent possible shredding of important documents and unnecessary payouts to top officers. March 31, 2003 is when Rakoff sets for WorldCom to go on trial for alleged fraud. Scott Sullivan tried to delay an internal audit that discovered the transfers of expenses to capital spending accounts, stated in a revised statement filed with the SEC. U. S. attorney in Mississippi was removed from the investigation of WorldCom because of conflict of interest and the case was taken over by the New York’s U. S. attorney’s office. Who is to blame? WorldCom’s chief executive, John Sidgmore, blamed the company’s former chief financial officer, Scott Sullivan and the former controller, David Myers. The two were fired for claiming $3. 8 billion in regular expenses as capital investment in 2001. The pair was arrested in New York, handcuffed and paraded in front of TV cameras as part of the Bush’s administration crackdown on corporate crime. Charged with securities fraud, conspiracy and other charges, they face 65 years in prison. WorldCom’s founder and former chief executive, Bernie Ebbers, says he was unaware of the accounting problems, and has not been charged. ” (Mark Tran.
August 9, 2002) What did WorldCom do? WorldCom files largest bankruptcy ever with $107 billion in assets. WorldCom filed Chapter 11, which has been long expected. Under Chapter 11, the company has to develop a reorganization plan and the company can continue to operate. WorldCom has lined up $2 billion in debtor-in-possession financing from Citigroup, J. P. Morgan and G. E. Capital to allow them to operate while in bankruptcy. WorldCom changed its name to MCI and moved headquarters from Mississippi to Dulles, Virginia in 2003. WorldCom emerged from bankruptcy in 2004 with about $5. 7 billion in debt and $6 billion in cash.
Half of the cash was anticipated to pay various claims and settlements. Previous bondholders were paid 35. 7 cents on the dollar, in bonds and stock in the new MCI Company, but the previous stockholders’ were worthless. Scott Sullivan and David Myers eventually pled guilty to securities fraud, conspiracy to commit securities fraud, and filing false statements. Bernard Ebbers was convicted and found guilty of all charges of fraud, conspiracy and filing false documents with regulators. Ebber was sentenced to 25 years in prison. He may be eligible to be released from prison in 20 years on terms of good behavior.
Where is WorldCom today? “On February 14, 2005, Verizon agreed to acquire MCI, formerly WorldCom, after SBC Communications agree to acquire AT&T just a few weeks earlier. The MCI / Verizon merger was put on hold until March 17, 2005 for them to evaluate a rival offer from Qwest, which made an offer that was potentially worth more. MCI accepted Verizon’s initial bid, although it had a lower cash value, because of their perceived financial stability in comparison to Qwest’s, but holders of 26% of MCI stock requested that they evaluate the merits of both offers before making a final decision.
Qwest later lost the battle for the acquisition of MCI. On October 6, 2005, the Special Meeting of MCI stockholders on the subject of Verizon’s acquisition resulted in 64 percent of outstanding shares in favor of Verizon’s offer. The European Union regulator approved the merger on October 7, stating that a combined company would still face strong competition in Europe. U. S. regulatory requirements were satisfied by December 29, 2005. MCI has been incorporated in Verizon with the name Verizon Business. ” (Editor. 2002) In doing my research on WorldCom, I found out how it was started and where it is today.
The scandal affected many people not just the employees who lost their jobs but also the stockholders that held investments in WorldCom. Many families lost their source of income and for some it may have been their only source of income. The stock rates dropped dramatically and were halted by the stock exchange. WorldCom started out with two businessmen in the mid 80’s to have it all taken away from them because of their top executives taken advantage of them. If more employees were alert of the fraud going on they should have reported it to the board of directors.
I am sure there were some employees who suspected the fraudulent activities, but didn’t do anything in fear of losing their jobs. I feel that the auditor’s at Arthur Andersen should have caught a lot of the misstatements while doing their audits. Maybe had more alert auditors to find the inconsistencies going on at WorldCom or even just did their job better. WorldCom board of directors should have investigated when in June of 2001 when several former employees gave statements alleging to the fraudulent activities taken place.
The fraud would have been caught sooner and maybe so many employees wouldn’t have lost their jobs. WorldCom / MCI are now Verizon Business. WorldCom grew to the second largest long distance telecommunication system at a rapid rate, but fell even faster. Reference Mark Tran. (August 9, 2002). WorldCom accounting scandal. Retrieved March 26, 2007 from http://www. guardian. co. uk/worldcom/story/0,,771947,00. html. Editor. (June 28, 2002). U. S. Securities and Exchange Commission. Retrieved March 26, 2007 from http://www. sec. gov/litigation/litreleases/lr17594. tm. Editor. (July 1, 2002). WorldCom: Wall Street scandal. Retrieved March 26, 2007 from http://news. bbc. co. uk/2/hi/business/2077838. stm. Editor. (2002). Wikipedia, the free encyclopedia. Retrieved March 26, 2007 from http://en. wikipedia. org/wiki/WorldCom. Luisa Beltran. (July 22, 2002). WorldCom files largest bankruptcy ever. Retrieved March 26, 2007 from http://money. cnn. com/2002/07/19/news/worldcom_bankruptcy. Editor. (2005). The rise and fall of WorldCom. Retrieved March 26, 2007 from http://www. usatoday. com/money/industries/telecom/2002-07-21-worldcom-chronology_x. htm.
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