Introduction
“Extraordinary Circumstances: The Journey of a Corporate Whistleblower” is a riveting memoir by Cynthia Cooper, a former Vice President of Internal Audit at WorldCom. In the book, Cooper recounts vividly her experience uncovering the largest accounting fraud in corporate history. She explains her difficult decision to blow the whistle on her employer. The book offers a firsthand account of the corporate white collar culture at WorldCom under the reigns of CEO Bernie Ebbers and the various pressures that saw the downfall of the company. Through her story, Cooper provides insight into the ethical dilemmas faced by corporate insiders and the personal and professional sacrifices required to do the right thing. This paper seeks to explain some of the theories and how I understand the details of the story in relation to corporate fraud.
The philosophy of CEO Bernie Ebbers
Bernie Ebbers, the former CEO at WorldCom, lived by the philosophy of growth and expansion at all costs. He was focused on increasing the market share of WorldCom. Being an underdog company with a CEO who had the typical rugs to riches story, he led with the ideology that the company needed to take risks and be bold to grow. His philosophy emphasized rapid growth and expansion through acquisitions, which led WorldCom to become the second-largest long-distance telecom company in the United States during the late 1990s and early 2000s. Despite this claim, he had a charismatic character and was well known for his ability to motivate his employees. (Cooper, 2008). (Arjo, 2008), explains the leadership approach of Ebbers, including his focus on growth and expansion, his charismatic leadership style, and his tendency to surround himself with loyal followers rather than independent thinkers.
How Bernie Ebbers pressured staff to cook the books
According to Cooper (2008), Bernie Ebbers pressured the company’s finance and accounting team to either meet or exceed the expectations set by Wall Street regarding their revenue and earnings growth. In order to achieve this goal, Ebbers set aggressive financial targets, and through encouraging the culture of secrecy and intimidation, employees became afraid to speak up about their concerns, let alone question his authority. All these were made possible through the hands-on approach employed by Ebber in managing the company’s finances. The approach heavily relied on getting involved with the day-to-day operations of the finance and accounting department. He often demanded that the accounting staff find ways that would reduce expenses or shift revenue from one period to another to make the company’s financial results appear better than they were. All these were made possible through unethical accounting tricks and fraudulent accounting entries that inflated the company’s earnings and hid expenses. The financial and accounting team were forced into using these practices to meet financial targets at any cost while working in a toxic environment that encouraged unethical and illegal behavior under a CEO who desired loyal followers rather than independent thinkers willing to work hard.
The role of David Myers and Scott Sullivan
Many people took part in the WorldCom accounting fraud scandal. David Myers worked as the controller and worked closely with Scott Sullivan, the CFO. Together they manipulated the company’s financial results. He played a crucial role in creating and executing the fraudulent accounting entries that inflated the earnings of WorldCom. On the other hand, Scott Sullivan, the CFO, was a central figure in the accounting fraud. He directed the accounting team to engage in fraudulent practices to meet Wall Street expectations for revenue and earnings growth (Cooper, 2008).
The role of Buford (Buddy) Yates and Betty Vinson
Buford (Buddy) Yates was the former accounting director at WorldCom who cooperated with the government’s investigation into the fraud scandal. He had been aware of the accounting irregularities and had previously tried to report internally but was ignored and eventually demoted. He was pivotal in the investigation, where he provided critical information to the government that helped uncover the fraud case. On the other hand, Betty Vinson, an accounting director, played a crucial role in executing fraudulent accounting entries. She was pressured by her superiors into engaging in illegal activities and believed that the order came from the higher-ups in the company (Cooper, 2008).
The role of Troy Normand and Charles Cannada
According to Cooper (2008), Troy Normand was also an accounting director involved in fraudulent accounting entries. He also cooperated with the government’s investigation and testified against Sullivan at trial. Another important figure in the fraud scandal was Charles Cannada, a former general counsel responsible for overseeing the company’s legal and regulatory compliance. He failed to take action to address the accounting irregularities at the company, despite his knowledge that they were being carried out. All these individuals, along with other executives and employees at WorldCom, played various roles in the accounting fraud scandal.
Internal control weaknesses found within the company
Cooper (2008) describes various internal control weaknesses within the company that was uncovered by Cyntia Cooper and her team during their secret night investigation. The first weakness was the lack of segregation of duties. Many employees in the accounting department had too much control over financial transactions, which allowed them to manipulate financial records without being detected. Furthermore, they discovered a weakness in the revenue recognition process, which needed to be improved and made it difficult to track revenue streams. The third weakness was inadequate oversight, where the senior management failed to provide adequate oversight to the company’s accounting practices and failed to take appropriate action when accounting irregularities were discovered. The final weakness was a poor corporate culture that had a foundation in fear and intimidation. This made it difficult for employees to speak up about concerns or report wrongdoings. These weaknesses made it easier for employees to engage in fraudulent accounting practices.
Why Barnie Ebbers Prohibited the Use of “internal control.”
According to Cooper (2008), Bernie Ebbers prohibited Cynthia from using the words “internal controls” in the audit reports because he was scared the reports would end up attracting the attention of regulators and investors. He knew that the company’s internal controls were weak and that the audit report would likely highlight these weaknesses. He hoped that by avoiding the attention on the company’s vulnerability and maintaining the company’s image as a strong and reliable investment, no one would come lurking around. Unfortunately, this prevented the audit report from accurately reflecting the weaknesses in the company’s internal controls. Ali & Qaddoumi (2015) suggest that the use of “internal control” in audit reports can have a significant impact on the inventors perception of the company and thus their investment decision which has been to linger in them selling their shares. Therefore, Bernie Ebbers was justified in being afraid of using “internal control” in audit reports with the way he was running things within the company.
Recommendations to mitigate corporate fraud
To prevent massive corporate fraud, a company requires a comprehensive approach that involves strengthening internal control to prevent fraudulent activities through regular internal audits, implementation of segregation of duties and establishment of effective oversight mechanisms, enhancing corporate governance by appointing independent directors, and having an effective board, the establishment of a strong ethical culture that puts emphasis on honesty, integrity, and transparency, and increasing regulatory oversight by implementing stronger regulations, and establishment of regulatory bodies with greater enforcement power and imposing a severe penalty for corporate fraud. Bruns Jr & Hertenstein (2005) also argue that there is a need for more robust corporate governance and increased regulatory oversight.
Implementing a comprehensive approach to prevent corporate fraud is crucial for companies to protect their stakeholders from the devastating consequences of fraudulent activities. Regular internal audits will strengthen internal controls by identifying potential fraud risks and implementing effective measures to prevent them. Segregation of duties is essential to prevent fraud as it ensures that no single individual has complete control over a particular task or function. Establishing an effective oversight mechanism helps ensure that internal controls are working correctly and that the risk of fraud is minimized. Having independent directors enhances corporate governance, and an effective board is essential to ensure the company is being run ethically and transparently. An ethical culture is critical in preventing corporate fraud as it encourages employees to act with integrity, honey, and transparency, which will reduce the risk of fraudulent activities. regulatory bodies must have greater enforcement power and impose severe penalties for fraudulent activities to deter companies from engaging in fraudulent activities.
References
Arjo, D. (2008). Leadership lessons from the rise and fall of WorldCom. Journal of Leadership and Organizational Studies, 14(3), 236–245. https://doi.org/https://doi.org/10.1177/1071791908314622
Bruns Jr., W. J., & Hertenstein, J. H. (2005). The Rise and Fall of WorldCom. Journal of Accounting and Finance.
Cooper, C. (2009). Extraordinary circumstances: The journey of a corporate whistleblower. John Wiley & Sons.
Qaddoumi, A. M., & Ali, M. A. (2015). The Effect of Internal Control Audit Reports on Investors’ Confidence and Investment Decisions. International Journal of Economics, Commerce, and Management.
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